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The Affluent Society 

John Kenneth Galbraith 


Fortieth Anniversary Edition 

A Mariner Book 


Copyright© 1958, 1969, 1976, 1998 
by John Kenneth Galbraith 

All rights reserved 

For information about permission to reproduce 
selections from this book, write to 
Permissions, Houghton Mifflin Company, 

215 Park Avenue South, New York, 

New York 10003. 

Library of Congress Cataloging-in-Publication Data 
Galbraith, John Kenneth, date 
The affluent society / John Kenneth Galbraith 

p. cm. 

Includes bibliographical references and index. 
isbn 0-395-63751-1 
isbn 0-395-92500-2 (pbk.) 

1. United States—Economic conditions—1945— 

2. United States—Economic policy. 

3. Economics—United States. I. Title 
HC106.5G32 1998 330.973 dc20 94-4816 


Printed in the United States of America 
Book design by Robert Overholtzer 
qum 10 987654321 


To Alan, Peter and Jamie 

The economist, like everyone else, must concern 
himself with the ultimate aims of man. 



Introduction to the Fortieth Anniversary Edition [>] 

1. The Affluent Society [>] 

2. The Concept of the Conventional Wisdom [>] 

3. Economics and the Tradition of Despair [>] 

4. The Uncertain Reassurance J>] 

5. The American Mood j>] 

6. The Marxian Pall j>] 

7. Inequality [>] 

8. Economic Security j>] 

9. The Paramount Position of Production j>] 

10. The Imperatives of Consumer Demand [>] 

11. The Dependence Effect j>] 

12. The Vested Interest in Output j>] 

13. The Bill Collector Cometh [>] 

14. Inflation J>] 

15. The Monetary Illusion J>] 

16. Production and Price Stability j>] 


17. The Theory of Social Balance [>] 

18. The Investment Balance j>] 

19. The Transition [>] 

20. The Divorce of Production from Security j>] 

21. The Redress of Balance J>] 

22. The Position of Poverty j>] 

23. Labor, Leisure and the New Class [>] 

24. On Security and Survival [>] 

Afterword [>] 

Index Jj>] 


publishing A new edition of a book after forty years one faces a serious 
question: How much should one change to reflect later thought? How 
much should remain to tell of the earlier mood and beliefs? I have opted, 
not exceptionally, for compromise. 

Much of the original text still has my approval. Nothing, for example, 
gives me more pleasure than the chapter on the concept of the 
conventional wisdom. That phrase has now passed into the language; I 
encounter it daily, used by individuals, some disapproving of my general 
stance on economics and politics, who have no thought as to its source. 
Perhaps I should have taken out a patent. 

More seriously, I still adhere to one of the book's main conclusions — 
that, sadly, economic writing and teaching instill attitudes and beliefs that 
resist accommodation to a changing world. In consequence, the early 
chapters stressing the importance of the history of economic thought and 


its continuing effect are as I would now write them. A grim view of the 
human prospect emerged from the writing of David Ricardo, Thomas 
Robert Malthus and, until his inevitable revolution, of Karl Marx. That 
matters have improved in the more fortunate countries of the world is not 
in doubt. A certain inherent pessimism remains. It is with a durably 
improved condition that The Affluent Society is primarily concerned. 

Central to the improvement has been a greater security in economic 
life and in its pecuniary return. This has been enhanced by the corporate 
managerial structure, the growth of the professions, employment in the arts 
and entertainment, social security, medical insurance, and much else. I 
would now, however, more strongly emphasize, and especially as to the 
United States, the inequality in income and that it is getting worse—that 
the poor remain poor and the command of income by those in the top 
income brackets is increasing egregiously. So is the political eloquence 
and power by which that income is defended. This I did not foresee. 

As the major theme of the book, I urged that the production of goods 
and services is the measure of civilized success. This I would still stress. 
The Gross Domestic Product remains the accepted measure not only of 
economic but of larger social achievement. It also wonderfully rewards the 
fortunate, especially the business executive, who, in the common case, 
effectively sets his own pay. (When someone seeks to sound a humane 
note, he stresses that the real social reward of production is not the 
increased income but the jobs provided. This establishes the speaker as a 
man 1 of compassion.) 

In the real world, as I tell, the productive process incorporates the means 
by which wants are created, and these are further sustained by fashion, 
social aspiration and simple imitation. What others do or have, one should 
do or have. The most important and intrinsically most evident source of 
consumer demand is the advertising and salesmanship of those providing 
the product. First you make the good, then you make the market. This is 
deeply in conflict with accepted economic thought. In that, nothing was so 
fundamental as the concept of consumer sovereignty—the according of 
final economic authority to those the economic system serves. 

In the years after this book appeared, those who spoke for the 


established view, for consumer sovereignly, were not pleased. They were 
adamant, even angry, in opposition. The textbooks, as they were revised, 
took note of my heresy, rejected it and told that Ford had once tried to 
market a new and radically designed car called the Edsel. This the 
consumers, being sovereign, would not buy. Here was the true sovereignty. 

In time the opposition mellowed; that the consumer is, in fact, less than 
sovereign is, I judge, now accepted. Producer advertising and 
salesmanship are recognized forces. The Edsel seems to have disappeared 
from the textbooks. 

On two matters this book was right, and before its time. On one, time and 
economic changes have shown it to be wrong. I begin with the error. 

Running through the early editions of The Affluent Society was a 
strongly expressed warning about inflation. It was the prime threat 
hovering over a society of general well-being. Inflation or unemployment. 
This is no longer so clearly the case. The principal cause of inflation then 
was the interaction of wages and prices. Management and unions 
negotiated; wages were increased, in part because of past price increases; 
prices were then raised further in compensation. From the higher prices 
came new wage demands. The process continued—the wage-price spiral. 
Monetary and fiscal policy were effective in controlling it only so far as 
they curtailed investor and consumer expenditure, thus reducing 
production, increasing unemployment and so limiting the wage demands 
and the resulting price increases. It was a remedy decidedly worse than the 

This dismal sequence is now less of a threat. Production has shifted 
away from traditional industry where unions once were strong. The 
services, the professions and the arts, the entertainment and 
communications industries have become increasingly important areas of 
employment. So also the higher technology. Here the unions are less 
important or unimportant. And in the older industry, they are less 
aggressive, perhaps less forcefully led. Accordingly, the wage-price spiral 
is no longer a strongly motivating economic force, and so there is less 
inflation even when employment is high. For some time, as this is written, 
we have had low unemployment and little inflation, a circumstance much 


celebrated. This I did not foresee. I have quietly deleted some paragraphs 
that no longer apply. 

The two matters on which I can reasonably claim foresight are the 
distribution and maldistribution of money and effort between the public 
and the private living standards and the important question of the 

Forty years ago I stressed the compelling difference between public 
and private living standards. We had expensive radio and television and 
poor schools, clean houses and filthy streets, weak public services 
combined with deep concern for what the government spent. Public 
outlays were a bad and burdensome thing; affluent private expenditure was 
an economically constructive force. 

My case is still strong. The government does spend money readily on 
weaponry of questionable need and on what has come to be called 
corporate welfare. Otherwise there is still persistent and powerful pressure 
for restraint on public outlay. In consequence, we are now more than ever 
affluent in our private consumption; the inadequacy of our schools, 
libraries, public recreation facilities, health care, even law enforcement, is 
a matter of daily comment. The private sector of our economy has gained 
enormously in role and reward and therewith in political voice and 
strength. No similar political support is accorded the public sector, the 
weaponry and corporate welfare as ever apart. In civilized performance it 
has lagged even further behind the private sector, as it is now called. 

Forty years ago I did not fully foresee the extent to which affluence would 
come to be perceived as a matter of deserved personal reward and thus 
fully available to the poor, were they only committed to the requisite 
effort. The resulting solution is to have them take charge of their own well¬ 
being; government aid is a damaging intrusion, the enemy of individual 
energy and initiative. It must be resisted, which, though unmentioned, also 
saves money and protects the affluent from taxation. Given such social 
attitudes, it could be better to be poor in a poor country than poor in an 


affluent one. 

Views on the environment have also changed since I first wrote. Here 
attitudes are at least mildly better. When I finished the original manuscript, 
I concluded that one piece of prose on this subject was too rich; all 
sensible authors should react similarly to their occasional extravagance. 
The dubious passage, which I take the liberty of quoting here in full, was 
as follows: 

The family which takes its mauve and cerise, air- 
conditioned, power-steered and power-braked 
automobile out for a tour passes through cities that are 
badly paved, made hideous by litter, blighted buildings, 
billboards and posts for wires that should long since 
have been put underground. They pass on into a 
countryside that has been rendered largely invisible by 
commercial art. (The goods which the latter advertise 
have an absolute priority in our value system. Such 
aesthetic considerations as a view of the countryside 
accordingly come second. On such matters we are 
consistent.) They picnic on exquisitely packaged food 
from a portable icebox by a polluted stream and go on 
to spend the night at a park which is a menace to public 
health and morals, lust before dozing off on an air 
mattress, beneath a nylon tent, amid the stench of 
decaying refuse, they may reflect vaguely on the 
curious unevenness of their blessings. Is this, indeed, 
the American genius? 

In the end, I let the passage stay—it is still here. Never have I more 
narrowly escaped error. Apart only from my reference to the conventional 
wisdom, this was by far the most cited (and quoted) passage from the 
book. On occasion, it still crops up. It helped, how much one can never 
know, the movement to clean up the highways and perhaps the parks. My 
writing of The Affluent Society coincided more or less with my service on 
a commission appointed by the governor of Vermont (where my wife and I 
are part-time but devoted residents) that brought most roadside advertising 
to an end. It made the beauty of that state more fully available to its 
inhabitants and also brought an increasing and rewarding flow of 
scenically sensitive tourists. A larger concern for the environment, if still 


too weak, has become evident since the original edition. 

I began this book with a grant from the Guggenheim Foundation to make a 
study of poverty. Such grants often go astray; this one was no exception. 
What emerged was not a treatise on the poor but one on the affluent. I did 
conclude with a chapter on poverty and another on those who have 
escaped to what I call the New Class. All this is still relevant. There is no 
blight on American life so great as the enduring poverty in our great cities 
and of the still unseen poor in the rural and mountain regions. And, of 
course, in the larger world. 

Untreated, however, in my excursion into affluence is the privation and 
death among the poor of the planet, particularly in Africa and Asia. 
Perhaps from a sense of guilt I have, since writing this book, devoted a 
considerable part of my life to these problems. It is not, alas, something on 
which one has a rewarding sense of solution. Mass deprivation remains the 
most shocking aberration of modern times—the many who live short and 
misery-dominated lives in lands of abject poverty. A companion volume, 
The Non-Affluent Society, would have had a yet more urgent message. 


i. The Affluent Society 

wealth is not without its advantages and the case to the contrary, 
although it has often been made, has never proved widely persuasive. But, 
beyond doubt, wealth is the relentless enemy of understanding. The poor 
man has always a precise view of his problem and its remedy: he hasn't 
enough and he needs more. The rich man can assume or imagine a much 
greater variety of ills and he will be correspondingly less certain of their 
remedy. Also, until he learns to live with his wealth, he will have a well- 
observed tendency to put it to the wrong purposes or otherwise to make 
him self foolish. 

As with individuals so with nations. And the experience of nations 
with well-being is exceedingly brief. Nearly all, throughout all history, 
have been very poor. The exception, almost insignificant in the whole span 
of human existence, has been the last few generations in the comparatively 
small comer of the world populated by Europeans. Here, and especially in 
the United States, there has been great and quite unprecedented affluence, 
which until now has been the accepted future. 

The ideas by which the people of this favored part of the world 
interpret their existence, and in measure guide their behavior, were not 
forged in a world of wealth. These ideas were the product of a world in 
which poverty had always been man's normal lot and any other state was 
in degree unimaginable. This poverty was not the elegant torture of the 
spirit which comes from contemplating another man's more spacious 
possessions. It was the unedifying mortification of the flesh—from hunger, 
sickness and cold. Those who might be freed temporarily from such 
burden could not know when it would strike again, for at best hunger 
yielded only perilously to privation. It is improbable that the poverty of the 
masses of the people was made greatly more bearable by the fact that a 
very few—those upon whose movements nearly all recorded history 
centers—were very rich. 

No one would wish to argue that the ideas which interpreted this world 
of grim scarcity would serve equally well for the contemporary United 
States. Poverty was the all-pervasive fact of that world. Obviously it is not 
of ours. One would not expect that the preoccupations of a poverty-ridden 
world would be relevant in one where the ordinary individual has access to 


amenities—foods, entertainment, personal transportation, and plumbing— 
in which not even the rich rejoiced a century ago. So great has been the 
change that many of the desires of the individual are no longer even 
evident to him. They become so only as they are synthesized, elaborated 
and nurtured by advertising and salesmanship, and these, in turn, have 
become among our most important and talented professions. Few people at 
the beginning of the nineteenth century needed an adman to tell them what 
they wanted. 

It would be wrong to suggest that the economic ideas which once 
interpreted the world of mass poverty have made no adjustment to the 
world of affluence. There have been many adjustments, including some 
that have gone unrecognized or have been poorly understood. But there 
has also been a remarkable resistance. And the total alteration in 
underlying circumstances has not been squarely faced. As a result, we are 
guided, in part, by ideas that are relevant to another world; and as a further 
result, we do many things that are unnecessary, some that are unwise, and 
a few that are insane. Some are a threat to affluence itself. 


The foregoing tells the purpose of this book. The first task is to see the 
way our economic attitudes are rooted in the poverty, inequality and 
economic peril of the past. Then the partial and implicit accommodation to 
affluence is examined. The next task is to consider the devices and 
arguments, some elaborate, some meretricious, some in a degree 
dangerous, by which, in vital matters, we have managed to maintain an 
association with the older ideas which stemmed from a world where nearly 
all were poor. For no one should suppose that there is anything convenient 
or agreeable about the assumption of affluence as an economic fact. On the 
contrary, it threatens the prestige and position of many important people. 
And it exposes many of us to the even greater horror of new thought. We 
face here the greatest of vested interests, those of the mind. 

Finally, as we escape from the obsolete and contrived preoccupations 
associated with the assumption of poverty, we are able to see for the first 
time the new tasks and opportunities that are before us. This is not as 
reassuring as it sounds. One of the best ways of avoiding necessary and 
even urgent tasks is to seem to be busily employed on things that are 


already done. 

Such is the purpose. But first there is some preparatory work. For we 
have not clung to obsolete and impalpable assumptions concerning our 
society purely as the result of obtuseness and ignorance. Powerful as these 
influences may be, they are not that strong. On the contrary, in matters of 
social discussion, there are active and pervasive influences which bind us 
to the past and which, on occasion, even cause us to try to recover the 
moribund. We must first be aware of our captivity by these forces if we are 
later to engineer an escape. That is the task of the next chapter. 


No one will think this an angry book. Some may think it lacking in that 
beguiling modesty which is so much in fashion in social comment. The 
reader will soon discover that I think very little of certain of the central 
ideas of economics. But I do think a great deal of the men who originated 
these ideas. The shortcomings of economics are not original error but 
uncorrected obsolescence. The obsolescence has occurred because what is 
convenient has become sacrosanct. Anyone who attacks such ideas must 
seem to be a trifle self-confident and even aggressive. Yet I trust that 
judgments will not be too hasty. The man who makes his entry by leaning 
against an infirm door gets an unjustified reputation for violence. 
Something is to be attributed to the poor state of the door. 

Originality is something that is easily exaggerated, especially by 
authors contemplating their own work. There are few thoughts in this 
essay, or so I would imagine, which have not occurred to other 
economists. The reaction of many will be to welcome the elaboration of 
ideas to which evidence has already brought them. But these are also days 
in which even the mildly critical individual is likely to seem like a lion in 
contrast with the general mood. These are days when men of all social 
disciplines and all political faiths seek the comfortable and the accepted; 
when the man of controversy is looked upon as a disturbing influence; 
when originality is taken to be a mark of instability; and when, in minor 
modification of the scriptural parable, the bland lead the bland. Those who 
esteem this world will not enjoy this essay. Perhaps they should return it to 
the shelf unread. For there are negative thoughts here, and they cannot but 
strike an uncouth note in a world of positive thinking. 



No student of social matters in these days can escape feeling how 
precarious is the existence of that with which he deals. Western man has 
escaped for the moment the poverty which was for so long his all- 
embracing fate. The unearthly light of a handful of nuclear explosions 
would signal his return to utter deprivation if, indeed, he survived at all. I 
venture to think that the ideas here offered bear on our chances for escape 
from this fate. Illusion is a comprehensive ill. The rich man who deludes 
him self into behaving like a mendicant may conserve his fortune although 
he will not be very happy. The affluent country which conducts its affairs 
in accordance with rules of another and poorer age also forgoes 
opportunities. And in misunderstanding itself, it will, in any time of 
difficulty, implacably prescribe for itself the wrong remedies. This the 
reader will discover is, to a disturbing degree, our present tendency. 

Yet it would be a mistake to be too gravely depressed. The problems of 
an affluent world that does not understand itself may be serious, and they 
can needlessly threaten the affluence itself. But they are not likely to be as 
serious as those of a poor world where the simple exigencies of poverty 
preclude the luxury of misunderstanding but where, also and alas, no 
solutions are to be had. 


2. The Concept of the Conventional 


the first requirement for an understanding of contemporary economic and 
social life is a clear view of the relation between events and the ideas 
which interpret them. For each of these has a life of its own and, much as it 
may seem a contradiction in terms, each is capable for a considerable 
period of pursuing an independent course. 

The reason is not difficult to discover. Economic like other social life 
does not conform to a simple and coherent pattern. On the contrary, it 
often seems incoherent, inchoate and intellectually frustrating. But one 
must have an explanation or interpretation of economic behavior. Neither 
man's curiosity nor his inherent ego allows him to remain contentedly 
oblivious to anything that is so close to his life. 

Because economic and social phenomena are so forbidding, or at least 
so seem, and because they yield few hard tests of what exists and what 
does not, they afford to the individual a luxury not given by physical 
phenomena. Within a considerable range, he is permitted to believe what 
he pleases. He may hold whatever view of this world he finds most 
agreeable or otherwise to his taste. 

As a consequence, in the interpretation of all social life, there is a 
persistent and never-ending competition between what is right and what is 
merely acceptable. In this competition, while a strategic advantage lies 
with what exists, all tactical advantage is with the acceptable. Audiences 
of all kinds most applaud what they like best. And in social comment, the 
test of audience approval, far more than the test of truth, comes to 
influence comment. The speaker or writer who addresses his audience with 
the proclaimed intent of telling the hard, shocking facts invariably goes on 
to expound what the audience most wants to hear. 

Just as truth ultimately serves to create a consensus, so in the short run 
does acceptability. Ideas come to be organized around what the 
community as a whole or particular audiences find acceptable. And as the 
laboratory worker devotes himself to discovering scientific verities, so the 
ghost writer and the public relations man concern themselves with 


identifying the acceptable. If their clients are rewarded with applause, 
these artisans are deemed qualified in their craft. If not, they have failed. 
By sampling audience reaction in advance, or by pretesting speeches, 
articles and other communications, the risk of failure can now be greatly 

Numerous factors contribute to the acceptability of ideas. To a very 
large extent, of course, we associate truth with convenience—with what 
most closely accords with self-interest and personal well-being or 
promises best to avoid awkward effort or unwelcome dislocation of life. 
We also find highly acceptable what contributes most to self-esteem. 
Speakers before the United States Chamber of Commerce rarely denigrate 
the businessman as an economic force. Those who appear before the AFL- 
CIO are prone to identify social progress with a strong trade union 
movement. But perhaps most important of all, people approve most of 
what they best understand. As just noted, economic and social behavior are 
complex, and to comprehend their character is mentally tiring. Therefore 
we adhere, as though to a raft, to those ideas which represent our 
understanding. This is a prime manifestation of vested interest. For a 
vested interest in understanding is more preciously guarded than any other 
treasure. It is why men react, not infrequently with something akin to 
religious passion, to the defense of what they have so laboriously learned. 
Familiarity may breed contempt in some areas of human behavior, but in 
the field of social ideas it is the touchstone of acceptability. 

Because familiarity is such an important test of acceptability, the 
acceptable ideas have great stability. They are highly predictable. It will be 
convenient to have a name for the ideas which are esteemed at any time for 
their acceptability, and it should be a term that emphasizes this 
predictability. I shall refer to these ideas henceforth as the Conventional 


The conventional wisdom is not the property of any political group. On a 
great many modem social issues, as we shall see in the course of this 
essay, the consensus is exceedingly broad. Nothing much divides those 
who are liberals by common political designation from those who are 
conservatives. The test of what is acceptable is much the same for both. 


On some questions, however, ideas must be accommodated to the political 
preferences of the particular audience. The tendency to make this 
adjustment, either deliberately or more often unconsciously, is not greatly 
different for different political groups. The conservative is led by 
disposition, not unmixed with pecuniary self-interest, to adhere to the 
familiar and the established. These underlie his test of acceptability. But 
the liberal brings moral fervor and passion, even a sense of righteousness, 
to the ideas with which he is most familiar. While the ideas he cherishes 
are different from those of the conservative, he will be no less emphatic in 
making familiarity a test of acceptability. Deviation in the form of 
originality is condemned as faithlessness or backsliding. A "good" liberal 
or a "tried and true" liberal or a "true blue" liberal is one who is adequately 
predictable. This means that he forswears any serious striving toward 
originality. In both the United States and Britain, in recent times, liberals 
and their British counterparts of the left have proclaimed themselves in 
search of new ideas. To proclaim the need for new ideas has served, in 
some measure, as a substitute for them. The politician who unwisely takes 
this proclaimed need seriously and urges something new will often find 
him self in serious trouble. 

We may, as necessary, speak of the conventional wisdom of 
conservatives or the conventional wisdom of liberals. 

The conventional wisdom is also articulated on all levels of 
sophistication. At the highest levels of social science scholarship, some 
novelty of formulation or statement is not resisted. On the contrary, 
considerable store is set by the device of putting an old truth in a new 
form, and minor heresies are much cherished. And the very vigor of minor 
debate makes it possible to exclude as irrelevant, and without seeming to 
be unscientific or parochial, any challenge to the framework itself. 
Moreover, with time and aided by the debate, the accepted ideas become 
increasingly elaborate. They have a large literature, even a mystique. The 
defenders are able to say that the challengers of the conventional wisdom 
have not mastered their intricacies. Indeed, these ideas can be appreciated 
only by a stable, orthodox and patient man—in brief, by someone who 
closely resembles the man of conventional wisdom. The conventional 
wisdom having been made more or less identical with sound scholarship, 
its position is virtually impregnable. The skeptic is disqualified by his very 
tendency to go brashly from the old to the new. Were he a sound scholar, 
he would remain with the conventional wisdom. 


At the same time, in the higher levels of the conventional wisdom, 
originality remains highly acceptable in the abstract. Here again the 
conventional wisdom makes vigorous advocacy of originality a substitute 
for originality itself. 


As noted, the hallmark of the conventional wisdom is acceptability. It has 
the approval of those to whom it is addressed. There are many reasons why 
people like to hear articulated that which they approve. It serves the ego: 
the individual has the satisfaction of knowing that other and more famous 
people share his conclusions. To hear what he believes is also a source of 
reassurance. The individual knows that he is supported in his thoughts— 
that he has not been left behind and alone. Further, to hear what one 
approves serves the evangelizing instinct. It means that others are also 
hearing and are thereby in process of being persuaded. 

In some measure, the articulation of the conventional wisdom is a 
religious rite. It is an act of affirmation like reading aloud from the 
Scriptures or going to church. The business executive listening to a 
luncheon address on the immutable virtues of free enterprise is already 
persuaded, and so are his fellow listeners, and all are secure in their 
convictions. Indeed, although a display of rapt attention is required, the 
executive may not feel it necessary to listen. But he does placate the gods 
by participating in the ritual. Having been present, maintained attention, 
and having applauded, he can depart feeling that the economic system is a 
little more secure. Scholars gather in scholarly assemblages to hear in 
elegant statement what all have heard before. Again, it is not a negligible 
rite, for its purpose is not to convey knowledge but to beatify learning and 
the learned. 

With so extensive a demand, it follows that a very large part of our 
social comment—and nearly all that is well regarded—is devoted at any 
time to articulating the conventional wisdom. To some extent, this has 
been professionalized. Individuals, most notably the great television and 
radio commentators, make a profession of knowing and saying with 
elegance and unction what their audience will find most acceptable. But, in 
general, the articulation of the conventional wisdom is a prerogative of 
academic, public or business position. Thus any individual, on being 


elected president of a college or university, automatically wins the right to 
enunciate the conventional wisdom. It is one of the rewards of high 
academic rank, although such rank itself is a reward for expounding the 
conventional wisdom at a properly sophisticated level. 

The high public official is expected, and indeed is to some extent 
required, to expound the conventional wisdom. His, in many respects, is 
the purest case. Before assuming office, he ordinarily commands little 
attention. But on taking up his position, he is immediately assumed to be 
gifted with deep insights. He does not, except in the rarest instances, write 
his own speeches or articles; and these are planned, drafted and 
scrupulously examined to ensure their acceptability. The application of any 
other test, e.g., their effectiveness as a simple description of the economic 
or political reality, would be regarded as eccentric in the extreme. 

Finally, the expounding of the conventional wisdom is the prerogative 
of business success. The head of almost any large corporation—General 
Motors, General Electric, IBM—is entitled to do so. And he is privileged 
to speak not only on business policy and economics but also on the role of 
government in the society, the foundations of foreign policy, and the 
nature of a liberal education. In recent years, it has been urged that to 
expound the conventional wisdom is not only the privilege but also the 
obligation of the businessman. "I am convinced that businessmen must 
write as well as speak, in order that we may bring to people everywhere 
the exciting and confident message of our faith in the free enterprise way 
of life ... What a change would come in this struggle for men's minds if 
suddenly there could pour out from the world of American business a 
torrent of intelligent, forward-looking thinking. 


The enemy of the conventional wisdom is not ideas but the march of 
events. As I have noted, the conventional wisdom accommodates itself not 
to the world that it is meant to interpret, but to the audience's view of the 
world. Since the latter remains with the comfortable and the familiar, 
while the world moves on, the conventional wisdom is always in danger of 
obsolescence. This is not immediately fatal. The fatal blow to the 
conventional wisdom comes when the conventional ideas fail signally to 
deal with some contingency to which obsolescence has made them 


palpably inapplicable. This, sooner or later, must be the fate of ideas which 
have lost their relation to the world. At this stage, the irrelevance will often 
be dramatized by some individual. To him will accrue the credit for 
overthrowing the conventional wisdom and for installing the new ideas. In 
fact, he will have only crystallized in words what the events have made 
clear, although this function is not a minor one. Meanwhile, like the Old 
Guard, the conventional wisdom dies but does not surrender. Society with 
intransigent cruelty may transfer its exponents from the category of wise 
man to that of old fogy or even stuffed shirt. 

This sequence can be illustrated from scores of examples, ancient and 
modern. For decades prior to 1776, men had been catching the vision of 
the liberal state. Traders and merchants in England and in the adjacent 
Low Countries, and in the American colonies, had already learned that 
they were served best by a minimum of government restriction rather than, 
as in the conventional wisdom, by a maximum of government guidance 
and protection. It had become plain, in turn, that liberal trade and 
commerce, not the accumulation of bullion, as the conventional wisdom 
held, was the modern source of national power. Men of irresponsible 
originality had made the point. Voltaire had observed that "It is only 
because the English have become merchants and traders that London has 
surpassed Paris in extent and in the number of its citizens; that the English 
can place 200 warships on the sea and subsidize allies."^ These views were 
finally crystallized by Adam Smith in the year of American independence. 
The Wealth of Nations, however, continued to be viewed with discontent 
and alarm by the men of the older wisdom. In the funeral elegy for 
Alexander Hamilton in 1804, James Kent complimented his deceased 
friend on having resisted the "fuzzy philosophy" of Smith. For another 
generation or more, or in all western countries, there would be solemn 
warnings that the notion of a liberal society was a reckless idea. 

Through the nineteenth century, liberalism in its classical meaning 
having become the conventional wisdom, there were solemn warnings of 
the irreparable damage that would be done by Factory Acts, trade unions, 
social insurance and other social legislation. Liberalism was a fabric which 
could not be raveled without being rent. Yet the desire for protection and 
security and some measure of equality in bargaining power would not 
down. In the end, it became a fact with which the conventional wisdom 
could not deal. The Webbs, Lloyd George, La Follette, Roosevelt, 
Beveridge and others crystallized the acceptance of the new fact. The 


result is what we call the welfare state. The conventional wisdom now 
holds that these measures softened and civilized capitalism and made it 
tenable. There have never ceased to be warnings that the break with 
classical liberalism was fatal. 

Another interesting instance of the impact of circumstance on the 
conventional wisdom was that of the balanced budget in times of 
depression. Almost from the beginning of organized government, the 
balanced budget or its equivalent has been the sine qua non of sound and 
sensible management of the public purse. The spendthrift tendencies of 
princes and republics alike were curbed by the rule that they must 
unfailingly take in as much money as they paid out. The consequences of 
violating this rule had always been unhappy in the long run and not 
infrequently in the short. Anciently it was the practice of princes to cover 
the deficit by clipping or debasing the coins and spending the metal so 
saved. The result invariably was to raise prices and lower national self¬ 
esteem. In modern times, the issue of paper money or government 
borrowing from the banks had led to the same results. In consequence, the 
conventional wisdom had emphasized strongly the importance of an 
annually balanced budget. 

But meanwhile the underlying reality had gradually changed. The rule 
requiring a balanced budget was designed for governments that were 
inherently or recurrently irresponsible on fiscal matters. Until the last 
century, there had been no other. Then in the United States, England and 
the British Commonwealth, and Europe, governments began to calculate 
the fiscal consequences of their actions. Safety no longer depended on 
confining them within arbitrary rules. 

At about the same time, there appeared the phenomenon of the truly 
devastating depression. In such a depression, men, plant and materials 
were unemployed en masse; the extra demand from the extra spending 
induced by the deficit—the counterpart of the extra metal made available 
from the clipped coinage—did not raise prices uniquely. Rather, it mostly 
returned idle men and plant to work. The effect, as it were, was 
horizontally on production rather than vertically on prices. And such price 
increases as did occur were far from being an unmitigated misfortune; on 
the contrary, they retrieved a previous, painful decline. 

The conventional wisdom continued to emphasize the balanced budget. 
Audiences continued to respond to the warnings of the disaster which 


would befall were this rule not respected. The shattering circumstance was 
the great depression. This led in the United States to a severe reduction in 
the revenues of the federal government; it also brought pressure for a 
variety of relief and welfare expenditures. A balanced budget meant 
increasing tax rates and reducing public expenditure. Viewed in retrospect, 
it would be hard to imagine a better design for reducing both the private 
and the public demand for goods, aggravating deflation, increasing 
unemployment, and adding to the general suffering. In the conventional 
wisdom, nonetheless, the balanced budget remained of paramount 
importance. President Hoover in the early thirties called it an "absolute 
necessity," "the most essential factor to economic recovery," "the 
imperative and immediate step," "indispensable," "the first necessity of the 
Nation," and "the foundation of all public and private financial stability."- 
Economists and professional observers of public affairs agreed almost 
without exception. Almost everyone called upon for advice in the early 
years of the depression was impelled by the conventional wisdom to offer 
proposals designed to make things worse. The consensus embraced both 
liberals and conservatives. Franklin D. Roosevelt was elected in 1932 with 
a strong commitment to reduced expenditures and a balanced budget. In 
his speech accepting the Democratic nomination he said, "Revenue must 
cover expenditures by one means or another. Any government, like any 
family, can for a year spend a little more than it earns. But you and I know 
that a continuation of that habit means the poorhouse." One of the early 
acts of his administration was an economy drive which included a 
horizontal slash in public pay. Mr. Lewis W. Douglas, through a 
distinguished life a notable exemplar of the conventional wisdom, made 
the quest for a balanced budget into a personal crusade and ultimately 
broke with the administration on the issue. 

In fact, circumstances had already triumphed over the conventional 
wisdom. By the second year of the Hoover administration, the budget was 
irretrievably out of balance. In the fiscal year ending in 1932, receipts were 
much less than half of spending. The budget was never balanced during 
the depression. But not until 1936 did both the necessities and advantages 
of this course begin to triumph in the field of ideas. In that year, John 
Maynard Keynes launched his formal assault in The General Theory of 
Employment Interest and Money. Thereafter, the conventional insistence 
on the balanced budget under all circumstances and at all levels of 
economic activity was in retreat. Keynes, as we shall see presently, was on 
his way to being the new fountainhead of conventional wisdom. By the 


late sixties a Republican President would proclaim himself a Keynesian. It 
would be an article of conventional faith that the Keynesian remedies, 
when put in reverse, would be a cure for inflation, a faith that 
circumstances would soon be undermining. 


In the following pages, there will be frequent occasion to advert to the 
conventional wisdom—to the structure of ideas that is based on 
acceptability—and to those who articulate it. These references must not be 
thought to have a wholly invidious connotation. (The warning is necessary 
because, as noted, we set great ostensible store by intellectual innovation, 
though in fact we resist it. Hence, though we value the rigorous adherence 
to conventional ideas, we never acclaim it.) Few men are unuseful and the 
man of conventional wisdom is not. Every society must be protected from 
a too facile flow of thought. In the field of social comment, a great stream 
of intellectual novelties, if all were taken seriously, would be disastrous. 
Men would be swayed to this action or that; economic and political life 
would be erratic and rudderless. In the Communist countries, stability of 
ideas and social purpose is achieved by formal adherence to an officially 
proclaimed doctrine. Deviation is stigmatized as "incorrect." In our 
society, a similar stability is enforced far more informally by the 
conventional wisdom. Ideas need to be tested by their ability, in 
combination with events, to overcome inertia and resistance. This inertia 
and resistance the conventional wisdom provides. 

Nor is it to be supposed that the man of conventional wisdom is an 
object of pity. Apart from his socially useful role, he has come to good 
terms with life. He can t hink of himself with justice as socially elect, for 
society in fact accords him the applause which his ideas are so arranged as 
to evoke. Secure in this applause, he is well armed against the annoyance 
of dissent. His bargain is to exchange a strong and even lofty position in 
the present for a weak one in the future. In the present, he is questioned 
with respect, if not at great length, by Congressional committees; he walks 
near the head of the academic processions; he appears on symposia; he is a 
respected figure at the Council on Foreign Relations; he is hailed at 
testimonial banquets. He risks being devastated by hostile events. But by 
then he may be dead. Only posterity is unkind to the man of conventional 
wisdom, and all posterity does is bury him in a blanket of neglect. 


However, somewhat more serious issues are at stake. 


No society seems ever to have succumbed to boredom. Man has developed 
an obvious capacity for surviving the pompous reiteration of the 
commonplace. The conventional wisdom protects the community in social 
thought and action; in the immediately following chapters, we shall see 
how great this continuity is. But there are also grave drawbacks and even 
dangers in a system of thought which by its very nature and design avoids 
accommodation to circumstances until change is dramatically forced upon 
it. In large areas of economic affairs, the march of events—above all, the 
increase in our wealth and popular well-being—has again left the 
conventional wisdom sadly obsolete. It may have become inimical to our 
happiness. It has come to have a bearing on the larger questions of 
civilized survival. So while it would be much more pleasant (and also 
vastly more profitable) to articulate the conventional wisdom, this book 
involves the normally unfruitful effort of an attack upon it. I am not wholly 
barren of hope, for circumstances have been dealing the conventional 
wisdom a new series of heavy blows. It is only after such damage has been 
done, as we have seen, that ideas have their opportunity. 

Keynes, in his most famous observation, noted that we are ruled by 
ideas and by very little else. In the immediate sense, this is true. And he 
was right in attributing importance to ideas as opposed to the simple 
influence of pecuniary vested interest. But the rule of ideas is only 
powerful in a world that does not change. Ideas are inherently 
conservative. They yield not to the attack of other ideas but, as I may note 
once more, to the massive onslaught of circumstance with which they 
cannot contend. 


3. Economics and the Tradition of Despair 

economics, not entirely by accident, became a subject of serious study at 
an important turning point in the history of western man. This was when 
the wealth of national communities began, for the first time, to show a 
steady and persistent improvement. This change, which in advanced 
countries like England and Holland came some time in the eighteenth 
century, must be counted one of the momentous events in the history of the 
world. "From the earliest times of which we have record—back, say, to 
two thousand years before Christ—down to the beginning of the 
eighteenth century, there was no very great change in the standard of 
living of the average man living in the civilized centers of the earth. Ups 
and downs certainly. Visitations of plague, famine and war. Golden 
intervals. But no progressive violent change. 

Some of the intervals had been extended. For something over a century 
in late medieval England—from perhaps 1380 to 1510—workers or at any 
rate skilled artisans seem to have enjoyed a period of considerable 
prosperity. But as always before, the good times came to an end; by the 
close of the sixteenth century, the purchasing power of an artisan's wage 
had fallen by more than half. It remained low through the disorders of the 
Civil War, and progress was uncertain for a long time thereafter. Then 
early in the last century, these wages began the rise which, with slight 
interruption, has since continued. - 

There were reasons for the age-old stagnation as there were also 
reasons for the change. The productivity of an economy based on 
agriculture and household industry had inherent limits. And before the 
appearance of the national state, any surplus that might be accumulated 
was subject to the spoliation of armed marauders and might, in fact, be 
what would attract their attention. 

In the latter part of the eighteenth century, the factory began to replace 
the household at an accelerating rate as the center of productive activity. 
Output per man-hour was no longer limited by the simple technology and 
the small capital of the household and by the need to rely mostly on human 
or animal power. The new national states had begun to make effective the 
guarantee of internal order. Armies would still cross national frontiers and 
with considerable capacity for doing damage where they fought and trod. 


But the economic consequences of national armies in the age of 
nationalism have been almost infinitely small as compared with the 
damage wrought by feudal, marauding or crusading armies in the centuries 
before. Within a few years following the two World Wars, the standard of 
living of Western European countries, even those that were defeated and 
devastated, was higher than ever before. The economic life of the Middle 
East never recovered from the imaginative destruction, pillage and 
massacre of Genghis Khan. In contrast with recent experience, Germany 
required a hundred years to recoup the destruction and disorganization of 
the Thirty Years' War. However, a future national war using nuclear 
weapons would assuredly bring destruction abreast of the ancient art. 

But it would have been surprising if, as the conditions of life gradually 
improved in the eighteenth and nineteenth centuries, man had quickly 
forsaken the lessons of all the preceding ages and supposed this 
improvement to be permanent. This was all the more improbable, for, in 
the early years of the Industrial Revolution, the rewards of increased 
efficiency were distributed very unequally. It was the wealth of the new 
entrepreneurs, not that of their workmen, which was everywhere 
celebrated. Those who owned the new factories, or the raw materials or 
railroads or banks that served them, lived in the mansions by which the 
nineteenth century is still remembered. Their workers lived in dark and 
noisome hovels, crowded on dirty and unpaved streets along which 
missionaries and social reformers ventured with some sense of their own 
courage. And in the factories themselves, the old and the very young 
worked from early to late and for a pittance. In England, in the first half of 
the nineteenth century, both total production and output per person were 
rising rapidly. The number of people of means was increasing. So, too, as 
the mid-century approached, were real wages. But the improvement in the 
position of the masses was far less evident than the increase in industrial 
and mercantile wealth. If the poor were becoming less poor, this change 
was slight as compared with the growing contrast between the rich and the 

Economic ideas began to take their modem form in the late eighteenth 
and early nineteenth centuries. It was against this background of centuries- 
old stagnation relieved now by increasing wealth, but wealth not of the 
many but the few, that they were first worked out and offered. Economists 
would indeed have been indifferent to both history and environment had 
they not taken the privation and economic desolation of the masses for 


granted. In economics, misfortune and failure were normal. Success, at 
least for more than the favored few, was what had to be explained. 
Enduring success was at odds with all history and could not be expected. 
This was the legacy of circumstances to ideas. As we shall see, it has 
enjoyed a remarkable vitality. 


In the history of economic thought, Adam Smith (1723-1790), the first 
great figure in the central economic tradition,- is counted a hopeful figure. 
In an important sense, he was. His vision was of an advancing national 
community, not a stagnant or declining one. His title, An Inquiry into the 
Nature and Causes of the Wealth of Nations, had an obvious overtone of 
opulence and well-being. He offered an all but certain formula for 
economic progress. This was the liberal economic society in which 
regulation was by competition and the market and not by the state, and in 
which each man, thrown on his own resources, labored effectively for the 
enrichment of the society. 

But it was of aggregate wealth that Smith spoke. He had little hope that 
the distribution between merchants, manufacturers and landlords on the 
one hand, and the working masses on the other, would be such as much to 
benefit the latter. Smith regarded this distribution as depending in the first 
instance on relative bargaining strength. And he did not believe it difficult 
"to foresee which of the two parties must upon all ordinary occasions have 
the advantage in the dispute." In an admirably succinct comment on the 
balance of eighteenth-century economic power, he added: "We have no 
acts of Parliament against combining to lower the price of work; but many 
against combining to raise it."- So in the normal course of events, the 
income of the working masses would be pressed down and down. There 
was a floor below which they would not fall. "A man must always live by 
his work, and his wages must at least be sufficient to maintain him. They 
must even upon most occasions be somewhat more; otherwise it would be 
impossible for him to bring up a family, and the race of such workmen 
could not last beyond the first generation." 2 

But this obviously was not much. On the contrary, although Adam 
Smith is rarely identified with the idea, this was one of the beginnings of 
perhaps the most influential and certainly the most despairing dictum in 


the history of social comment, the notion that the income of the masses of 
the people—all who in one way or another worked for a living, whether in 
industry or agriculture—could not for very long rise very far above the 
minimum level necessary for the survival of the race. It is the immortal 
iron law which, as stiffened by Ricardo and refashioned by Marx, became 
the chief weapon in the eventual ideological assault on capitalism. 

Smith was not categorical about the iron law—he was categorical 
about almost nothing, and ever since, economists have always been at their 
best when they adhered to his example. Thus, he conceded that a scarcity 
of workers might keep wages above the subsistence level for an indefinite 
time. Under conditions of rapid economic growth, wages would also rise. 
Growth was much more important than wealth perse in its effect on wages. 
"It is not the actual greatness of national wealth, but its continual increase, 
which occasions a rise in the wages of labor.... England is certainly, in the 
present times, a much richer country than any part of North America. The 
wages of labor, however, are much higher in North America than in any 
part of England. "- 


Smith's two great successors in the central tradition were David Ricardo 
(1772-1823) and Thomas Robert Malthus (1766-1834). With Adam 
Smith, they were the founding trinity of economics, at least as the subject 
is known in the English-speaking countries. As the man who first gave 
economics its modem structure—who looked at the factors determining 
prices, rents, wages and profits with a sense of system that has served 
economists ever since—Ricardo has a special claim to have bent the twig. 
Marxians and non-Marxians are, or were, equally in his debt. 

With Ricardo and Malthus, the notion of massive privation and great 
inequality became a basic premise. These conclusions were never wholly 
unqualified. But the qualifications were only qualifications. It was to 
Ricardo and Malthus that Carlyle alluded when he spoke in 1850 of the 
"Respectable Professors of the Dismal Science" and gave to economics a 
name that it has never quite escaped because it was never quite 

Of Malthus, it is necessary to say only a word. Through the nineteenth 


century and to our own day, he has been intimately and all but exclusively 
identified with his Essay on Population. Though he had other and 
important things to say on economics which have been the subject of a 
latter-day rediscovery, it is for his views on population that he will always 
be known. 

The number of people who can live in the world is obviously limited 
by the number that can be fed. Any increase in the supply of food would 
bring, in Malthus's view, an increase in the number of people to consume 
it. Nothing but stark need limits the numbers who are propagated and who 
endure. As a result, men will forever live on the verge of starvation. In the 
later editions of the Essay, Malthus hedged somewhat; the increase in 
response to a surplus over subsistence might be tempered by "moral 
restraint" and also, somewhat more ambiguously, by "vice." In other 
words, people might indefinitely protect their standard of living at a level 
above subsistence, and this would become all the more likely once both 
restraint and vice were abetted by effective contraceptive techniques. But 
as also with Ricardo, Malthus's qualifications were lost in the sweep of his 
central proposition. This was the inevitability of mass poverty. There was 
also the considerable fact that for a large part of the world, the central 
proposition was valid and the qualifications were unimportant. So it was 
and so it remains in much of Asia. Malthus, it may be noted, was professor 
of political economy in Haileybury College, an institution maintained by 
the East India Company to train for service in India. 

Since most men had always been poor, it is hardly surprising that 
Malthus was, on the whole, unperturbed by his conclusions and that he did 
not feel called upon to propose any remedy. (He confined himself to 
urging the postponement of marriage and to recommending that there be 
incorporated into the marriage service a warning that the husband and not 
the state would be responsible for the children of the union so that if these 
were excessive, the parents could expect to be punished by want.) "The 
note of gloom and pessimism which distinguished so much of the 
economic doctrine of the nineteenth century is in no small measure the 
legacy of Malthus. "- 


Both Adam Smith and Malthus had an instinct for national aggregates— 


for the forces which acted to enrich the nation. While Malthus was 
concerned with showing how increased national wealth might be used up 
in the explosive impulse to procreate, neither was centrally concerned with 
how different individuals and classes might share in what the economy 
produced. This to David Ricardo was of primary interest. What were the 
laws which governed the distribution of product or income among the 
landlords, entrepreneurs and workers who had claim to it? "Political 
Economy you think is an enquiry into the nature and causes of wealth—I 
think it should rather be called an enquiry into the laws which determine 
the division of the product of industry amongst the classes who concur in 
its formation."- These laws, as Ricardo formulated them, worked with 
ferocious inequality. 

Like Malthus, Ricardo regarded population as a dependent variable—it 
"regulates itself by the funds which are to employ it, and therefore always 
increases or diminishes with the increase or diminution of capital. "- 
Advancing wealth and productivity thus bring more people; but they do 
not bring more land from which to feed these people. As a result, those 
who own land are able to command an ever greater return, given its 
quality, for what is an increasingly scarce resource. Meanwhile, in 
Ricardo's view, profits and wages were in flat conflict for the rest of the 
product. An increase in profits, other things being equal, meant a reduction 
in wages; an increase in wages must always come out of profits. "Every 
rise of profits," on the other hand, "is favourable to the accumulation of 
capital, and to the further increase of population, and therefore would, in 
all probability, ultimately lead to an increase of rent."— The effect of these 
compact relationships will be clear. If the country is to have increasing 
capital and product, profits must be good. But then as product expands, the 
population will increase. The food requirements of the population will 
press on the available land supply and force up rents to the advantage of 
the landowner. In other words, capitalists must prosper if there is to be 
progress and landlords cannot help reaping its fruits. The victims of this 
inescapable misfortune are the people at large. Ricardo summarized that 
prospect in, perhaps, the most quoted passage in economic literature: 
"Labour, like all other things which are purchased and sold, and which 
may be increased or diminished in quantity, has its natural and its market 
price. The natural price of labour is that price which is necessary to enable 
the labourers, one with another, to subsist and perpetuate their race, 
without either increase or diminution. "- 


This was the iron law of wages. As with Smith (and Malthus on 
population), Ricardo followed the proposition with qualifications. In an 
"improving" society, the market wage might be above the natural wage for 
an indefinite period, and were Ricardo still alive, he could show with little 
difficulty that the conditions necessary for the rule of the iron law have 
been in abeyance ever since the nineteenth day of April, 1817, when On 
the Principles of Political Economy and Taxation was published. But 
although the truth rarely overtakes falsehood, it has winged feet as 
compared with a qualification in pursuit of a bold proposition. The iron 
law, in its uncompromised clarity, became part of the intellectual capital of 
the world. 

Moreover, as with Malthus, nothing could be done about it. Ricardo 
brought his analysis to a close with the unbending observation that "These 
then are the laws by which wages are regulated, and by which the 
happiness [a word to be duly noted] of far the greatest part of every 
community is governed. Like all other contracts, wages should be left to 
the fair and free competition of the market, and should never be controlled 
by the interference of the legislature."— Nor may anyone be blamed. On a 
number of occasions, Ricardo complained that Malthus was unfairly 
accusing him of being hostile to landlords—"one would suppose from his 
language that I considered them enemies of the state."— The landlords 
were merely the passive and natural beneficiaries of their great good 
fortune. This was the nature of things. Such was the Ricardian legacy. 

There were many contradictions and ambiguities in Adam Smith. 
There were also flaws in the Ricardian logic as it applied to the Ricardian 
world. His treatment of capital and profits left much to be desired. And he 
preoccupied himself with land at almost the point in history when, because 
of the opening of a new world, it had begun to lose its ancient 
preoccupying importance. Yet it is hard to think that economists ever came 
much closer to interpreting the world in which they lived than did Smith, 
Ricardo and Malthus. None was committed to preconceived doctrine. They 
had broken decisively with the conventional wisdom of the traditionalist 
and mercantilist society. They had no public opinion to appease. The result 
was a formidable interpretation of, and prescription for, the world as they 
found it. 

In a world that had for so long been so poor, nothing was so important 
as to win an increase in wealth. The prescription—to free men from the 


restraints and protection of feudal and mercantilist society and put them on 
their own—was sound, for it was already proving itself. This was not a 
compassionate world. Many suffered and many were destroyed under the 
harsh and unpredictable rule of competition and the market. But many had 
always perished for one reason or another. Now some were flourishing. 
This was what counted. One looked not at the peril and misfortune, for 
there had always been peril and misfortune, but at the opportunity. In any 
case, nothing could be done about the inequality, for it was not rooted in 
mutable social institutions but in biology. This was fortunate, for the state 
was excluded from intervention by its prior commitment to freedom of 

Remarkably little that concerned contemporary economic society was 
left unbuttoned. It is hardly surprising that a system seemingly so complete 
and practical and so subject to test against the realities of the world made 
an indelible dent on men's minds. 


For thirty years following the death of Ricardo, the development of 
economics continued firmly in the tradition he had established. Lesser 
men, together with the conscientious and immeasurably learned John 
Stuart Mill, refined, developed and organized the ideas. Their thoughts 
remained centered on the liberal economic society—that in which 
economic life was regulated by the market and not by the state. On the 
continent, men did talk about socialism but in England and in the Anglo- 
Saxon tradition, they took the market very nearly for granted. 

Then, at mid-century, the economic ideas in descent from Ricardo 
came to the great divide. The central tradition continued in its course. It 
continued to provide the skeletal framework for economic ideas down to 
our own day. In so doing, it gave them system and continuity and went far 
to make economic life comprehensible. But now, branching off to the left 
but with a common debt to Ricardo, was the revolutionary tradition of Karl 
Marx. Henceforth, in shaping attitudes toward economic life, it was both a 
massive competitor of, and a powerful influence on, the central tradition. 

The purpose of these chapters is not to trace the evolution of the 
individual ideas. That is the task of other volumes and even more of other 
authors. Rather, it is to see what economics assumed in its origins about 


the ordinary individual and his fate. As between the early Ricardian world 
and that of Marx, there was in this respect no difference. For both, the 
prospect, given the uninterrupted working out of the underlying forces, 
combined peril with hopelessness. The difference was that Ricardo and his 
immediate followers expected the system to survive and Marx did not. 
But, for Ricardo, the system survived not because it served the ordinary 
man. Obviously it did not. It survived only because there was no evident 
alternative and certainly none that was better. Any effort to modify it made 
it less efficient. 

In time, the case for the continuation of the liberal economic society 
changed. Its superior efficiency was still argued. But, by almost 
imperceptible degrees, it came to be argued, or at least implied, that it was 
also tolerable. It provided a reasonable prospect for the ordinary man and 
something better for the individual of exceptional capacities. This was 
widely taken as ushering in an age of optimism on man's material 
prospects. On closer examination, to which we now turn, we shall see how 
much of the natal pessimism survived. 


4. The Uncertain Reassurance 

as it was left by Malthus and Ricardo, the economic prospect for the 
ordinary individual was remarkably dull. His normal expectation was to 
live on the edge of starvation. Anything better was abnormal. Progress 
would enhance the wealth of those who, generally speaking, were already 
rich but not that of the masses. Nothing could be done about it. And these 
are more than the casual conclusions of two men. They have claim to be 
considered the propositions on which modem economic thought was 

In the usual view, from the middle of the nineteenth century on, 
economists became more sanguine, even optimistic. England was the 
center of the influential discussion. She was in her great era of commercial 
and industrial expansion. Real wages were rising. There was a clear and 
apparently enduring margin over mere subsistence. In Western Europe and 
America, the Malthusian horror was also receding, although it was still 
possible to suppose that this was the temporary result of the opening, all in 
a few decades, of the North American prairies and plains, the pampas and 
the veld, the New Zealand pastures and the endless Australian outback. 
These could rescue the world once but not twice. When population had 
caught up with these new areas, population would again press upon the 
food supply. In time, this fear receded, especially in the affluent world. 
Men came to worry more about surpluses of farm products than about a 
shortage of food. But it has not yet been extirpated. The ghost of Malthus 
still hovers over India, Bangladesh and other countries of what is called 
the Third World. And not everyone is certain that the rich countries are 
assured of enduring abundance. 

In the more specific realm of economic theory, the latter half of the last 
century saw the rejection of the iron law. For a time, the income of those 
who worked was thought to be limited by the amount of working capital 
somehow dedicated to the employment of labor in agriculture and 
industry. This was the famous wages fund which John Stuart Mill once 
espoused and then rejected. Doubts then began to arise as to whether a 
single generalization on wages would suffice. Education and special skills 
came to be regarded as having costs of production that had to be paid. 
Special abilities, it was concluded, would, like land, command a rent. 
Finally, by the end of the century, the worker's return—bearing always in 


mind that by this is meant the income of the masses of the people—was 
being related to the value of his marginal product; i.e., to what he added to 
the value of his employer's product. Were he paid less than the value of his 
contribution, it would be open to a competitor to offer him more, for in a 
competitive world there would be other employers whose product he could 
increase by more than his wage. As a result—a result that might be greatly 
aided by effective bargaining by a union—wages would tend to be equated 
with the marginal productivity. This might be high if workers were scarce 
or highly productive and low if they were redundant or incompetent. But 
obviously this was a long distance from the iron law, and the break became 
complete when it no longer seemed certain that well-being brought a self- 
liquidating flood of children. 

With the development of the marginal productivity theory, the effort to 
construct a general theory of remuneration came pretty much to an end. 
Having satisfied themselves, as it were, that poverty for those who toiled 
was not the natural order of things, economists turned to other questions. 
More recent work has concerned itself with unions and with the bargaining 
power which Adam Smith, a notably prescient man, identified as the real 

Yet it would be a great mistake to suppose that economics in the 
central tradition had escaped from its history. For one thing, the notion of 
an upper limit on the incomes of the masses of the people died very 
slowly; perhaps these incomes might not be pressed remorselessly down to 
the floor but they would still be under a ceiling. At the end of the last 
century, Alfred Marshall (1842-1924), whose Principles educated older 
members of recent generations of economists, was still impelled to argue 
that if "economic conditions of the country remain stationary sufficiently 
long ... both machines and human beings would earn generally an amount 
that corresponded fairly with their cost of rearing and training, 
conventional necessaries as well as those things which are strictly 
necessary being reckoned for."- In other words, wages would cover the 
cost of producing the children, as these costs are conventionally reckoned, 
and no more. As with Ricardo, the tendency was still to a minimum. In the 
United States in the early decades of the present century, the leading figure 
in the central tradition and the most respected teacher of his time was 
Professor Frank W. Taussig of Harvard. His summary of the prospect for 
the ordinary individual which he republished as late as 1936 was as 
follows: "The usual rate of wages for ordinary labor in the United States 


was during the first decade of the twentieth century not far from $800 a 
year. This is much better than savagery...[but]...If no more is in prospect, 
the institution of private property stands not only on the defensive but in a 
position that cannot long be defended. Yet something better is by no 
means incompatible with the system.'- He was not yet prepared to assert 
categorically that something better was wholly compatible with the 


There remained down to our own time, in short, the lingering conviction 
that while economic life for the masses might not be intolerable, it would 
still not be very good. In this degree Ricardo still ruled. He ruled in 
another respect. For it was also believed that if men were poor, not much 
could be done about it. By skill, diligence and training, the individual 
could raise his marginal product and hence the wage he could claim. As 
the most obvious avenue of escape for the individual from poverty, this 
became a factor of great importance in shaping economic attitudes. There 
will be occasion to return to it later. But if a worker's wage was low, it was 
because his marginal product had remained low. To raise his wage without 
raising his marginal productivity would be to put his pay above his 
contribution. This would make it profitable for his employer to fire him. 
Thus the alternative to low wages was unemployment. Nor is this an 
antique view. "Each worker receives the value of his marginal product 
under competition. If a minimum wage is effective, it must therefore have 
one of two effects: first, workers whose services are worth less than the 
minimum wage are discharged (and thus forced into unregulated fields of 
employment or into unemployment...) or, second, the productivity of low- 
efficiency workers is increased." - The second likelihood was discarded. 
The legislation was thus shown to be damaging to those for whom it was 

The marginal productivity theory, moreover, provided no reassurance 
on the other malign tendency of the Ricardian system, which was for the 
rich to become very rich indeed. Capital, like labor, was compensated at a 
rate corresponding to its marginal product. However appropriate and just 
this arrangement of things might be, it followed that if the capital were 
owned in large amounts by few individuals, it would be to these that its 
income would accrue. The resulting inequality might be very great. 


Observation suggested that this would be the case. In the half century 
following the Civil War in the United States, men accumulated fortunes of 
incredible size. Between 1892 and 1899, John D. Rockefeller's personal 
dividends from Standard Oil amounted to between $30 million and $40 
million. In 1900, Andrew Carnegie had an income from his steel 
companies of $23 million.- These revenues were not subject to tax, and the 
dollar then was worth much more than now. In addition to oil and steel, 
railroads, real estate, copper, banking and other pursuits returned vast 
rewards. While some of it represented a return on capital, some could 
readily be related to a strategic grip on "original and (not perhaps entirely) 
indestructible powers of the soil" and of the subsoil from which, precisely, 
Ricardo expected vast wealth would be derived. 

There was uneasiness in the central tradition over this inequality. The 
inheritance of wealth was a special source of discomfort. Perhaps one 
could justify riches as the reward for the skill, diligence, foresight and 
cunning of the original creator. None of this justified its highly fortuitous 
devolution on the individual who happened to be his son. Monopoly was 
also regarded with grave misgiving. This rewarded not production but the 
ability to control production. Moreover, the rule of competition, a point to 
be emphasized in a moment, was fundamental. Nothing else so completely 
and utterly underwrote the logic of the system. Inequality resulting from 
monopoly might be the warning of fatal flaws in the system itself. 

Those who might themselves be subject to equalization have rarely 
been enthusiastic about equality as a subject of social comment. As a 
result, there has anciently been a muted quality about debate on the 
subject. Still, the economists in the central tradition stated their position 
with some clarity. There is, Marshall observed, "no moral justification for 
extreme poverty side by side with great wealth. The inequalities of wealth, 
though less than they are often represented to be, are a serious flaw in our 
economic organisation."- In the United States, Taussig was more specific. 
"No stretch of psychological analysis concerning the spur of ambition, the 
spice of constant emulation, the staleness and flatness of uniformity, can 
prevail against the universal conviction that the maximum of human 
happiness is not promoted by great, glaring, permanent inequality. "- 



The economy of the central tradition presupposed competition. This, also, 
was a source of misgiving—a misgiving that was often elaborately 
disguised but nonetheless acute. 

The role of competition in the central tradition was fundamental and it 
became increasingly precise. Numerous firms competed to supply markets 
at prices that none controlled. The efficient and the progressive were 
rewarded with survival and growth. The inefficient and unprogressive 
were penalized by extinction. The employees obviously were involved in 
the rewards and penalties of their employers and had something of the 
same inducements to efficiency. 

Competition was also the instrument of change. As the tastes of the 
sovereign consumer altered, the demand for some products rose and so did 
their prices. The demand and prices of products that were less in vogue 
declined. Firms in the areas favored by the new demand expanded and 
others were attracted in. Where demand was shrinking, firms would close 
down or lay off workers and contract operations. To the extent that it 
might be possible, some would follow the market into the areas of 
expanding demand. Capital as well as labor and entrepreneurial talent was 
distributed according to need by the same process. 

In the closing decades of the last century and the early years of the 
twentieth century, economists became increasingly preoccupied with the 
operation of the model of a competitive society. As it was developed and 
idealized, it was a thing of precision and symmetry, almost of beauty. The 
hold which it came to exercise on men's minds has often been noted.- 
There was no equally explicit appreciation of the fact that it committed 
men to a remarkable measure of uncertainty. The penalty for falling behind 
in the race for increased efficiency was bankruptcy. This could also be the 
penalty of mere bad luck in the case of the producer whose product was no 
longer wanted. And in the case of the worker, the component of luck, as 
opposed to the role of penalty and reward for performance, was multiplied. 
The most oaken worker could turn up in the employ of an inadequate 
entrepreneur. The just misfortunes of the employer would then be visited 
quite irrationally upon his faithful servant. He could lose his job and his 
livelihood equally through his own shortcomings and those of others. 
Needless to say, the competitive model had no place for individuals who, 
as the result of age, infirmity, industrial injury or congenital incompetence, 
had only a low or negligible marginal productivity. 


These misfortunes did not go entirely unperceived. It was ever 
necessary to assert that they were "part of the system." And it was also 
made clear by the prophets of the competitive model, not without a certain 
ruthless logic, that to seek to mitigate the risks and uncertainties of the 
system would be to undermine the system itself. The race for increased 
efficiency required that the losers should lose. If consumers were to rule, 
there must be rewards for those producers who were in the path of current 
tastes and penalties for those who were left behind. To seek to mitigate the 
penalties was to undermine the incentives—to separate the stick from the 

Abridgment of the rigors of competition might even be unjust and 
immoral. "The traders or producers, who find that a rival is offering goods 
at a lower price than will yield them a good profit, are angered at his 
intrusion, and complain of being wronged; even though it may be true that 
those who buy the cheaper goods are in greater need than themselves, and 
that the energy and resourcefulness of their rival is a social gain."- Indeed, 
there is a curious likelihood that the competitive model, as it was 
adumbrated by the textbooks, was intrinsically more insecure and 
dangerous than anything produced by competition in real life. In the real 
world, competition was abridged by custom, monopoly, trade unions, 
torpor, legislation and even a degree of compassion. Thus the penalties for 
falling behind in the race were exacted less relentlessly in practice than in 

The basic impact of these ideas will be clear. The economic system 
pictured in the central tradition was a thing of peril for those who 
participated in it and so, pro tanto, was economic life in general. This peril 
was a virtue, and the purer the peril, the better the performance of the 
system. Yet the intrinsic insecurity was disturbing and in two respects. The 
vulnerability of the weakest members of the society could not entirely be 
ignored. An economic system which of constitutional necessity was so 
unfeeling, so intolerant of weakness, was troubling. Even in the best of 
causes, compassion is difficult to control. And equally disturbing was the 
unwillingness of ordinary men—businessmen, farmers, workers, reformers 
—to live with that peril. At every turn, they showed their inclination to 
press collectively or with the aid of government for measures designed to 
make their lives more secure. Even if the insecurity of the competitive 
model was not a damaging flaw, the efforts at self-protection that it 
induced almost certainly were. 


In addition, there was the gnawing doubt as to whether competition, in 
fact, existed. As the nineteenth century wore along, both firms and 
fortunes grew. Control over economic life seemed to be passing into fewer 
hands—a development which was heralded by Marx as marking the 
system's ultimate collapse. As the notion of competition became 
intellectually more precise, the behavior of the economy became 
empirically more at odds with the competitive model. Where the latter 
called for many firms in a market, there were in real life often few. Where 
the competitive model called for a price that no firm controlled, in real life 
some firms, at least, seemed to have quite considerable discretionary 
power over price. And unions were not without power of their own. 

In the twentieth century, economists in the central tradition began to 
accommodate the competitive model to these seeming facts of life. Instead 
of pure competition, there was monopolistic competition or imperfect 
competition. With this came more doubts. Who could be sure that a 
blending of competition and monopoly would be benign? Might not such 
oddly assorted parents produce a misshapen progeny? - 


There was a final source of disquiet in the central tradition. That was the 
serious depression. Depression through the nineteenth and the first decades 
of the twentieth centuries had become ever more difficult to ignore. 
Business suffered a sharp setback in the eighteen-seventies following the 
resumption of specie payment after the Civil War. There was a period of 
comparative stagnation in the eighteen-nineties and a brief interruption 
following the financial panic in 1907. There was a short but severe 
depression following World War I. Then came the vast disaster of the 
nineteen-thirties. What was the meaning of these recurring misfortunes for 
the future of the system? Perhaps men might not starve amidst Malthusian 
scarcity, but might it not still be their fate to starve amidst an abundance of 
goods that they could not buy? Was it not a fair conclusion that by 
whatever means they were predestined to poverty? 

Nothing in the history of social ideas is more interesting than the 
treatment of the so-called business cycle in the central tradition of 
economic thought. Its study was isolated in a separate compartment until 
very recent times. Prices, wages, rents and interest, all of which were 


profoundly affected by depressions, were studied very largely on the 
assumption that depressions did not occur. Normal conditions were 
assumed; normal meant stable prosperity. In the separate study of the 
business cycle, emphasis was placed on the peculiar and nonrecurring 
conditions which lay back of each depression—the retirement of the 
greenbacks prior to 1873, the readjustments following World War I, the 
breakdown of international trade and capital movements and the collapse 
of the stock market in 1929. But, paradoxically, there was an equal 
emphasis—sometimes in the same work—on the rhythmic and normal 
character of the succession of good times and bad. The etymology 
emphasized the rhythm—as noted, the study was not of depressions but of 
the business cycle which served to remind everyone that just as bad times 
followed good, so good times would follow the bad. Even the word 
depression itself was the terminological product of an effort to soften the 
co nn otation of deep trouble. In the last century, the term crisis was 
normally employed. With time, however, this acquired the connotation of 
the misfortune it described. And Marx's reference to the "capitalist crisis" 
gave the word an ominous sound. The word panic, which was a partial 
synonym a half century ago, was no more reassuring. As a result, the word 
depression was gradually brought into use. This had a softer tone; it 
implied a yielding of the fabric of business activity and not a crashing fall. 
During the great depression, the word depression acquired from the event 
it described an even more unsatisfactory connotation. Therefore, the word 
recession was substituted to connote an unfearsome fall in business 
activity. But this term eventually acquired a foreboding quality and a 
recession in 1953-1954 was widely characterized as a rolling 
readjustment. By the time of the Nixon administration, the innovative 
phrase "growth recession" was brought into use. 

To view the business cycle as a normal rhythm was to regard it as self- 
correcting. Hence, nothing needed to be done about it. Remedies are 
unnecessary if the patient is certain to recover, and they are also unwise. 
Writing in 1934, Joseph A. Schumpeter, then with Wesley C. Mitchell one 
of the world's two most eminent authorities on the business cycle, 
surveyed the experience of the preceding century and concluded, "In all 
cases ... recovery came of itself... But this is not all: our analysis leads us 
to believe that recovery is sound only if it does come of itself. For any 
revival which is merely due to artificial stimulus leaves part of the work of 
depressions undone and adds, to an undigested remnant of maladjustment, 
new maladjustments of its own."— 


Had depressions always remained mild, the notion of a normal rhythm, 
which wisdom required be undisturbed, would have been reassuring. But 
as depressions became more violent, such a view was the very reverse of 
reassuring. Workers lost their jobs. Farm prices fell and some farmers lost 
their farms. Investors lost their savings and some businessmen, more 
particularly the smaller ones, went bankrupt. And all this was insouciantly 
described as normal. The conclusion was inevitable: there must be 
something very wrong with a system in which such faults were normal. 
Especially in the early thirties, the ideas in the central tradition acted 
powerfully to breed such doubts. And those who were immune to such 
uneasiness had another reason for disquiet. Although it was unwise to do 
anything about depressions, ignorance and popular passion might easily 
force some action. This could only serve to make things worse. In face of a 
really bad depression, the notion of a normal self-correcting cycle was 
calculated to provide uneasiness tailored for every temperament. 

There is little need to stress the consequences. To the lingering fear 
that poverty might be normal, the increasing conviction that inequality was 
inevitable and the sense of individual insecurity which was inherent in the 
competitive model, the orthodox view of the business cycle added a much 
more general sense of disquiet. This was the insecurity of a householder 
who is told that, in the normal and regular course of events, he must expect 
his house to catch fire and his property to be partially or wholly destroyed. 
The fire cannot be prevented or arrested, for it has its work to do; to call 
for a fire department is to invite an attempt to drown the flames by 
drenching them with gasoline. 

Such was the legacy of ideas in the great central tradition of economic 
thought. Behind the facade of hope and optimism, there remained the 
haunting fear of poverty, inequality and insecurity. Partly latent, partly in 
the suppressed background of conviction, these doubts could easily be 
aroused by such an occurrence as the great depression. 

But the reader will surely ask if there was not a more confident stream 
of ideas—one more completely purged of all traces of the Ricardian 
gloom. The question will occur especially to Americans: surely in the 
American tradition, there must have been a more consistently optimistic 
current. Here there must have been some who rejected doubt—who 
reflected an indigenous and abounding confidence. Perhaps among those 
who neither read nor wrote there was such confidence. But those who gave 


voice to the American ideas were far from confident. 


5. The American Mood 

only within very narrow limits can one speak of a separate American 
tradition in economics. Ideas do not respect national frontiers, and this is 
especially so where language and other traditions are in common. The 
precepts of the central tradition were accepted equally by Englishmen and 
Americans. It was from Smith, Ricardo, Mill and Marshall that American 
economic ideas were derived. The ideas were written by Americans into 
the textbooks and enlarged or amended as to detail. But, in the last century, 
not much was added by American theorists. Just as the ideas were 
common to both countries, so were the worries, uncertainties and doubts 
which the ideas engendered. 

This is not to say there were no distinctively American figures but, as 
compared with the majestic authority of the central tradition, their 
influence was comparatively small. There would be a measure of 
agreement on who were the three that were most heard. They were not the 
total of the American voice but they were also far more than a mere 
sample. Of the three, two did nothing to offset the presumption of 
privation and the sense of foreboding which lingered in the central 
tradition. On the contrary, they did a good deal to accentuate it. 

The exception was Henry Charles Carey (1793-1879), who did voice 
the buoyant optimism which one is obliged to think appropriate to the new 
republic. Ricardo, he observed, had never seen from his window the 
progress of a new settlement; had he done so, he would have had a 
different view of the prospects for mankind. Drawing on such observation, 
Carey argued that, with the passage of time, men were not forced, as 
Ricardo claimed, to poorer and poorer land with ever lower return to their 
labor and, for any land that was better than the worst, ever higher rents to 
the landlords. On the contrary, they first cultivated the thin but 
unencumbered soil on top of the hills. Then at a later period they tackled 
the thick vegetation in the valleys; having cleared away the trees, they 
proceeded to work this richer alluvial soil. The returns to their toil were 
not less but more. In his first book, in 1835, which, like those of his 
English contemporaries, centered on the problem of wages and thus as 
ever on the mass prospect for poverty or well-being, he argued that real 
wages during the previous forty years had shown a tendency to rise. This, 
too, was in contrast with Ricardian expectations. 


But even Carey was not an unqualified optimist. He more than half 
agreed with Malthus on the procreative power of mankind and, in his 
earlier books, he hazarded the guess that the time might come when "there 
will not even be standing room."- And the influence of Carey, whether as 
an optimist or pessimist, was not great. Of this, he himself was aware. He 
complained bitterly of the small attention that was paid to his ideas in his 
own country. In Europe, he felt that he was discussed more seriously, and 
this may well have been so.=Little or nothing of Carey passed into the 
tradition of American economic thought. His books moldered and died. In 
the last seventy-five years, he has been mentioned only as a curiosity—an 
early American economist who had the fortitude to disagree with Ricardo 
on rent and with Adam Smith on the virtues of free trade. 


The two other distinctively American figures had more enduring influence. 
These were Henry George and Thorstein Veblen. But so far from 
manifesting the exuberant attitudes of the frontier, both were prophets of a 
gloom that was, in some respects, more profound than that of Ricardo. 
Henry George (1839-1897) was, like Marx, the founder of a faith, and the 
faithful still assemble to do honor to their prophet. Like Adam Smith, he 
made clear his view of the social prospect in the title of his remarkable 
book: Progress and Poverty. An Inquiry into the Cause of Industrial 
Depressions and of Increase of Want with Increase of Wealth. In the 
opening chapter, he posed his basic questions: Why in a time of general 
economic advance—he was writing in the depression years following 1873 
—should so much labor "be condemned to involuntary idleness," should 
there be so much "want, suffering and anxiety among the working 
classes"?- Why, to press things further, should there be so little gain to the 
poorest classes from increased productive power? "Nay, more," why 
should its effect be "still further to suppress the condition of the lowest 

The reason for this perverse aspect of progress was again part of the 
almost infinite legacy of Ricardo. Labor and capital increased in 
productivity; the land supply remained constant in quality and amount. 
Rents, as a result, increased more than proportionately and made the 
landlords the undeserving beneficiaries of advance. The anticipation of 
rent increases and attendant speculation in land values were also the cause 


of depression. (It is worth recalling that the nineteenth century was marked 
by recurrent outbreaks of real estate speculation, especially in the 
American West, and that Henry George spent much of his life in 
California. Economic ideas, as ever, have their nexus with their 
environment.) So long as there was private property in land, poverty and 
depressions were the prospect. Progress would make them worse. 

In one respect, Henry George was radically more optimistic than 
Ricardo. On his title page were the further words The Remedy; this phrase 
had no place in the Ricardian lexicon. If land were nationalized—more 
precisely, if a tax were imposed equal to the annual use value of real 
property ex its improvements, so that it would now have no net earnings 
and hence no capital value of its own—progress would be orderly and its 
fruits would be equitably shared. But this, obviously, was a very drastic 
prescription. Were the remedy not applied, and this was a reasonable 
prospect given the predictable reaction of property owners to the proposal, 
then the consequence would be continuing poverty combined with 
increasing inequality and increasing insecurity. If this was the American 
dream, it had little to commend it as compared with the meager classical 
prospect. And, in fact, the mood of Henry George's followers was often 
one of misanthropic or frustrated radicalism. 


In the tradition of American popular radicalism, there were other 
influential figures besides Henry George—Henry Demarest Lloyd and 
Edward Bellamy come especially to mind as important figures of the latter 
decades of the last century. Their conclusions, however, were broadly 
similar: great inequality and great poverty were inevitable in the absence 
of great reform. And unlike Henry George, their words mostly died with 
them. There remains, however, the man whom many regard as the 
uniquely American economist, Thorstein Veblen (1857-1929).- 

For the eager search for reassurance that followed the Ricardian 
gloom, Veblen substituted a grandiloquent iconoclasm. Ricardo had 
forecast a disagreeable fate for most of mankind. His followers hoped 
against hope that it might not be. Veblen took a position above the debate. 
The fate of man was something with which, at least for purposes of 
posture, he chose not to identify himself. But he also made clear his view 


that those who talked of progress were mostly feckless optimists or frauds. 

To this end, he made specific many of the misfortunes that lurked in 
the background of the central tradition. Poverty, or more accurately both 
the moral and material debasement of man, was part of the system and 
would become worse with progress. There is an inescapable conflict 
between industry and business—between the "excessive prevalence and 
efficiency of the machine industry" and its "deplorable" tendency to 
overproduce and thus to threaten the basic goal of business which is to 
make money.- In this conflict, business always wins. Monopolistic 
restrictions are imposed where, on purely technical grounds, there could be 
abundance. This channels income to the owners. The public pays with 
relative impoverishment. 

The economic costs of progress are, however, even less severe than its 
cultural consequences. Machine industry does not necessarily call for less 
intelligence on the part of the workers. But it does require a peculiarly 
narrow and mechanical process of thought and it discourages all other. It 
also undermines family and church and (here the unions play a key role) 
the ancient foundations of law and order. The massing together of the 
workers is a great inducement to "socialist iconoclasm" which is the 
threshold to anarchy. 

Serious depressions are not accidental misfortunes. They are inherent 
in the conflict between industry and business and hence are organic 
aspects of the system. They occur "in the regular course of business. "- 

Finally, in his immortal The Theory of the Leisure Class,- Veblen 
dramatized, as no one before or since, the spectacle of inequality. The rich 
and successful were divorced from any serious economic function and 
denied the dignity of even a serious or indignant attack. They became, 
instead, a subject for detached, bemused and even contemptuous 
observation. One watches the struggle between hens for social pre¬ 
eminence in the chicken yard as an interesting phenomenon but, in so 
doing, one does not do much to underwrite the social values of the birds. 
So with Veblen on the rich. 

But equally with Ricardo, wealth and poverty were made inherent. And 
so, moreover, were their least ingratiating aspects. The ostentation, waste, 
idleness and immorality of the rich were all purposeful: they were the 


advertisements of success in the pecuniary culture. Work, by contrast, was 
merely a caste mark of inferiority. "During the predatory culture labour 
comes to be associated in men's habits of thought with weakness and 
subjection to a master. It is, therefore, a mark of inferiority, and, therefore, 
comes to be accounted unworthy of man in his best estate."- In the central 
tradition, the worker was accorded the glory of honest toil. Veblen denied 
him even that. 

Nor was there any hope for change. These things were part of the 
pecuniary culture. Where Marx looked forward hopefully to revolutionary 
reconstruction, Veblen did not. In his latter years, he comforted himself 
only with the thought that the evolving economic society was destroying 
not only itself, but all civilization as well. Such was the view of the 
greatest voice from the new America. 

There will always be debate as to how influential Veblen was. He is 
the indubitably indigenous figure in American economic thought. This has 
always commended him to those who—failing to see the enormous 
authority of the orthodox-classical tradition—have supposed that the 
dominating influence in American thought must be an American.— This 
must still be true even though, as in the case of Veblen, no one could 
worse fit the cultural stereotype of the optimistic, extrovert American. In 
fact, Veblen's strictly economic conclusions were not widely read or 
taught. They never entered the textbooks in competition with the ideas of 
the central tradition. Yet he was no Carey. He influenced a generation of 
scholars, writers and teachers. These, in turn, brought something of his 
iconoclasm to the ideas of the time. Teachers influenced by Veblen taught 
the doctrines of the central tradition but they brought to it a disbelief, even 
a contempt, for the notion that economic progress could much benefit the 
masses or, indeed, that there was such a thing. Veblen thus precipitated the 
doubts and pessimism which lurked in the central tradition. In American 
social thought before the great depression, there was a strong feeling, 
manifested for example in such liberal journals as The Nation and The New 
Republic, that the hard-headed intellectual was never beguiled by notions 
of reform or advance under capitalism. These when offered were either a 
facade, a trap or an illusion which would quickly bring disenchantment. 
These attitudes faded with the New Deal, but not until after the Roosevelt 
reforms had been similarly and repeatedly discussed and dismissed. These 
attitudes were in no small measure the legacy of Veblen. 



Such was the distinctively American contribution. However, we must take 
note of the impact of another set of social ideas—ideas which, though not 
American in origin, came almost uniquely to root in the American soil. 
Toward the close of the last century and in the early years of this, they 
deeply influenced attitudes on the fate of the ordinary man. These were the 
doctrines of the Social Darwinists. 

Ricardo and Malthus did not conceal from anyone that theirs was a 
world of struggle. In that struggle, some, and perhaps many, succumbed 
and there was no hope in public measures to ameliorate the lot of those 
who were to fall. Speaking of the poor laws, then supported by a fund 
subscribed by each parish for the support of the indigent, Ricardo 
concluded that no scheme for their amendment "merits the least attention, 
which has not their abolition for its ultimate object," adding that "the 
principle of gravitation is not more certain than the tendency of such laws 
to change wealth and power into misery and weakness." — 

However, Ricardo's case for leaving everything to the market—for not 
allowing compassion to interfere with economic process—was essentially 
functional. Idleness not being subsidized and substance not being wasted, 
more was produced and the general well-being would thus be raised. 
Struggle and misfortune were not themselves to be welcomed. 

The position of the Social Darwinists was different. Economic society 
was an arena in which men met to compete. The terms of the struggle were 
established by the market. Those who won were rewarded with survival 
and, if they survived brilliantly, with riches. Those who lost went to the 
lions. This competition not only selected the strong but developed their 
faculties and ensured their perpetuation. And in eliminating the weak, it 
ensured that they would not reproduce their kind. Thus the struggle was 
socially benign and, to a point at least, the more merciless, the more 
benign its effects, for the more weaklings it combed out. 

The birthplace of these ideas was nineteenth-century England, and 
their principal source and protagonist was Herbert Spencer (1820-1903). It 
was Spencer and not Charles Darwin who gave the world the phrase "the 
survival of the fittest." Spencer believed that acquired as well as inherited 
traits were genetically transmitted. 


He was a decidedly uncompromising exponent of a very 
uncompromising creed. He opposed state ownership of the post office and 
the mint. He was opposed to public education, for it interfered with 
parental choice between different schools and, indeed, with the choice 
between wisdom and ignorance for their children. Public aid to the needy 
and even public sanitation tended to perpetuate the more vulnerable 
members of the race. 

Partly by weeding out those of lowest development, and 
partly by subjecting those who remain to the never 
ceasing discipline of experience, nature secures the 
growth of a race who shall both understand the 
conditions of existence and be able to act up to them. It 
is impossible in any degree to suspend this discipline by 
stepping in between ignorance and its consequences, 
without, to a corresponding degree, suspending the 
progress. If to be ignorant were as safe as to be wise, no 
one would become wise. — 

Spencer was restrained from a condemnation of all private charity only 
by the disturbing thought that this would abridge the liberty of the giver as 
surely as it would winnow out the weaklings of the race. Misery and 
misfortune are not misery and misfortune alone but the rungs of a ladder 
up which man makes his ascent. To seek to mitigate misery was to put in 
abeyance the fundamental arrangements by which nature ensured progress. 
"What can be a more extreme absurdity than that of proposing to improve 
social life by breaking the fundamental law of social life."— 

Although Spencer was an Englishman, Social Darwinism had much of 
its greatest success in the United States. Here, in William Graham Sumner 
(1840-1910) of Yale, it found its major prophet. Here too it found a host 
of minor ones. Spencer's own books were widely read, or at least widely 
discussed, in the closing decades of the nineteenth century and the opening 
years of the present one. When he visited the United States in 1882, he was 
accorded a welcome by the faithful befitting a messiah. In 1904, when the 
Supreme Court struck down a New York State law limiting the hours of 
labor of bakers to ten a day, Justice Holmes observed that "The Fourteenth 
Amendment does not enact Mr. Herbert Spencer's Social Statics."—It was 
a dissenting opinion. 


There were a number of reasons for this popularity in the new republic. 
By the time of Spencer, England was already moving away from the 
unhampered rule of the market. Unions, factory inspection, the regulation 
of the hours of women and children had gained acceptance. In the United 
States, the race was still being more ruthlessly improved. 

And there were many who wished to see the improvement continue 
with all it implied for those who had been selected. "The peculiar 
condition of American society," Henry Ward Beecher told Spencer as 
early as 1866, "has made your writings far more quickening here than in 
Europe."— In fact, ideas were never more marvelously in the service of 

The rise of Social Darwinism in the United States coincided with the 
rise of the great fortunes. It was a time not only of heroic inequality but of 
incredible ostentation. Great limestone mansions were rising in New York 
City. Even more stately pleasure domes were being built in Newport. Mrs. 
William K. Vanderbilt gave her $250,000 ball in 1883. That of the Bradley 
Martins in 1897 was rather more lavish. For this, the ballroom of the old 
Waldorf-Astoria was transformed into a replica of Versailles. One guest 
appeared in a suit of gold-inlaid armor valued at an estimated $10,000. A 
little earlier at Delmonico's—where Spencer had been entertained—guests 
were given cigarettes wrapped in hundred-dollar bills which they lighted 
with a legitimate sense of affluence. 

It was also a time of widespread poverty and degradation. The distant 
workers who supported this wealth lived in noisome slums. There were 
numerous beggars near at hand. Nor could it always be said that the wealth 
was being acquired without cost to others. The techniques were sometimes 
very rude. But none of this need lie on anyone's conscience. Natural 
selection was at work. The rich could regard themselves as the product of 
its handiwork—as Chauncey Depew was pleased to remind those who 
attended one of the great dinners of the successful in New York. So, an 
important point, could their sons, for the superior qualities were 
genetically transmitted. This legitimized inherited wealth, for it blessed 
only the biologically superior. The problem of poverty, meanwhile, was 
being solved by the only means by which it could be solved. The unfit 
were being weeded out. Public and even private succor, which if 
compelled by compassion could be inconveniently expensive, was banned 
not by callousness but by a perceptive adherence to the laws of nature. 


"The law of the survival of the fittest was not made by man. We can only 
by interfering with it produce the survival of the unfittest." — How much 
better to resist taxation and charity and, incidentally, keep one's money. To 
this day, the man who refuses a beggar and righteously observes, "I'm told 
it's the worst thing you can do," is still finding useful the inspired formula 
of Spencer and Sumner. 

Nor need one reflect, uncomfortably, on the methods by which growth 
had been achieved and wealth acquired. As John D. Rockefeller explained 
to a fortunate Sunday School class: "The growth of a large business is 
merely the survival of the fittest ... The American Beauty rose can be 
produced in the splendor and fragrance which bring cheer to its beholder 
only by sacrificing the early buds which grow up around it." As with the 
rose, so with the Standard Oil Company. "This is not an evil tendency in 
business. It is merely the working-out of a law of nature and a law of 
God."— This did align God and the American Beauty rose with railroad 
rebates, exclusive control of pipelines, systematic price discrimination, and 
some other remarkably aggressive business practices. 


In 1956, the retiring president of the National Association of 
Manufacturers called solemnly in the name of Herbert Spencer on the 
working men of the country to reject the slavery of their unions and on 
businessmen to renounce the paternalism of Washington. Concerning the 
latter, he said in a dynamic sentence: "Before we can build solidly into the 
glorious future that is another unsound part of our structure which we'll 
have to get rid of, even though it causes severe pain to us businessmen to 
forgo the federal crutches we have been leaning on." Neither workers nor 
businessmen took any concrete steps in response to his plea. 

In fact, the names of Spencer and Sumner had long since ceased to 
evoke response. Both democracy and the modern corporation had dealt 
crippling blows. The masses of the people had shown a marked 
unwillingness to vote for the self-denying policies which would contribute 
to their own combing out. Individuals were always coming forward with 
ideas for abridging the struggle and then winning elections on this 
platform. Those who toyed, however cautiously, with Spencerian virtue, as 
Barry Goldwater learned in 1964, suffered massive rejection. If Social 


Darwinism was to work, there all too obviously had to be some 
curtailment of popular government. To enforce acquiescence in 
misfortune, there also needed to be a constabulary whose loyalty, most 
likely, could only be ensured by social security and seniority. 

The corporation dealt a different kind of blow. The competitive 
struggle, as a device for separating the strong from the weak, at least had 
elements of plausibility in the world of the individual entrepreneur. And 
conceivably the rugged traits which permit of survival in this contest are 
passed on to strengthen the generations that follow. It is not so easy to 
apply this reasoning to the case of General Electric or General Motors. 
These show marked indications of immortality. And it is not clear how 
selection works through reproduction to bring a new generation of young 
and vigorous companies reflecting the strong bloodlines of their corporate 
parents. Perhaps it could be argued that natural selection operates to bring 
to the top those who are most effective in the struggle for promotion—that 
it rewards with survival those who are most skilled in the tough, complex 
and ingenious talents that such advance so often requires. If so, then Social 
Darwinism would work just as selectively in government where the 
bureaucratic struggle is reputedly severe. This could not be. 

Yet Social Darwinism bore importantly on the attitudes which 
Americans brought into the age of affluence. This was the country where 
wealth was increasing most rapidly. It was the one where the reassurance 
of the central tradition might seem to be most plausible. Here, if anywhere, 
the ordinary man had a chance. Perhaps he did, but he also had to face the 
fact that all economic life was a mortal struggle. He might win but he also 
might lose, and for him to accept the lull consequences of loss—hunger, 
privation and death—was a social necessity. Poverty and insecurity thus 
became inherent in the economic life of even the most favored country. So, 
of course, did inequality, and this was firmly sanctified by the fact that 
those who enjoyed it were better. If observation suggested that economic 
life might be less severe in the United States, Social Darwinism 
emphasized the contrary. 

It had another lasting effect. American thought has always been prone 
to attribute a special mystique to the market. More than mere efficiency is 
involved in an uninhibited operation of supply and demand. Other values 
are at stake. The Social Darwinists identified the vigor of the race with the 
market. This notion eventually withered and disappeared. But others 


identified yet other and equally extraneous values with the market and 
warned, accordingly, of the pervasive consequences of anything which, in 
the name of welfare or compassion, might interfere with the free play of 
market forces. Biological progress is no longer threatened by measures 
which lessen the perils of economic life for the individual. But liberty still 
is. So, in one fairly substantial view, is Christianity as opposed to secular 
socialism or communism. To a considerable degree, it was Social 
Darwinism which led the way in so broadening the claim for the market. In 
so doing, it narrowed the scope for social measures designed to rescue the 
individual from the privation or to protect him from the hazards of 
economic life. 


One would not care to claim that this chapter exhausts the influences 
which have borne distinctively on American economic attitudes. As noted, 
the frontier and the West had their own expansive mood. So, on the whole, 
did a good deal of American political debate in the latter part of the last 
century and the early decades of the present one. Without question, much 
of this expressed the conviction that any American—at a minimum, any 
properly energetic American of Anglo-Saxon and Protestant antecedents— 
could by his own efforts be comfortably opulent. But the ideas which were 
taught and read, and by which the properly qualified were guided, were far 
from sanguine. The most influential critics were either misanthropic or 
committed to the need for massive reform. The established and reputable 
men of the right pictured and praised a struggle that improved on that of 
Ricardo only in being more heroic and spectacular and in rejoicing over 
the immolation of the unfortunate. 


6. The Marxian Pall 

in the descent from Ricardo, the Social Darwinists were an eddy to the 
right. Marx was a massive eruption to the left. But the roots of Marx were 
deep in the central tradition. There were socialists before Marx, but there 
have been a great many more since. One reason is that Marx built 
socialism on Ricardo's orderly arrangement of economic ideas and, in 
particular, on his bold conception of the problem of income distribution. 
At least partly as a result, his work carried an authority and conviction that 
were incomparably greater than that of any of his socialist predecessors. 

For seventy-five years following his death, Ricardo's admirers were 
concerned to defend him from the charge, leveled among others by 
Ruskin, that he was a cold-blooded stockbroker who took a totally 
detached view of the misery he foresaw for all eternity. The charge may 
have been unfair, but no one has suggested that Ricardo was a man of 
passion. Karl Marx (1818-1883) was a man of passion and of Jovian 
wrath, and this is a matter of first importance. For the Ricardian 
conclusions—the inevitable impoverishment of the masses, the progressive 
enrichment of those who own the natural means of production, the 
inevitable conflict between wages and profits and the priority of the latter 
for progress—could become, in the hands of an angry man, a call to 
revolution. As noted, Marx's conception of capitalism was no more 
gloomy than that of Ricardo or of Malthus. But unlike Ricardo and 
Malthus, Marx's mission was to identify fault, place blame, urge change 
and, above all, to enlist disciplined belief. In the latter, his success 
exceeded that of any man since Mohammed. 


The iron law of wages continued in Marx but in a modified form. The 
worker is kept on the margin of destitution less because he breeds up to 
this point than because of his utter weakness in dealing with the capitalist 
employer and because the system won't work if he is well paid. On 
occasion, he may get more than the bare minimum, but it is for the same 
reason that the dairyman feeds his cows more than the maintenance ration 
—they give him more milk. The bargaining position of the worker vis-a- 
vis the employer is the same as that of the cows vis-a-vis the dairyman. 


This is partly so because the labor force is a reservoir into which, with 
the passage of time, independent craftsmen and farmers are also forced. 
Helplessness is assured by the industrial reserve army—by the rising and 
falling but enduring margin of unemployment which is part of the system. 
Any worker at any time can be flushed into this reserve, which ensures that 
he will be cooperative and will accept the wage that is offered him. 

The advance of the arts and the accumulation of capital bring no 
benefit to the average man. On the contrary, in some of Marx's 
characteristic prose, they "...mutilate the labourer into a fragment of a man, 
degrade him to the level of appendage of a machine, destroy every 
remnant of charm in his work and turn it into hated toil ... drag his wife 
and child beneath the Juggernaut...[bring] misery, agony of toil, slavery, 
ignorance, mental degradation...- 

Resorting to a device which many others have found useful, Marx dug 
up a candid opponent to help him make his case. A prominent 
conservative, Destutt de Tracy, had observed: "In poor countries the 
people are comfortable, in rich nations they are generally poor."= 

Further, and in its ultimate influence perhaps the most important of all, 
the system had an inherent tendency to devastating depression. Sismondi, 
the great Swiss historian, philosopher and economist, had published at the 
beginning of the century a book which reflected much of the hopeful 
attitude of Adam Smith. Then, sixteen years later and after extensive 
travels over Western Europe, he returned to the subject impressed by the 
importance of industrial crises and persuaded that they would get worse. 
The trouble was that the purchasing power of the workers did not keep 
abreast of what they produced. As a result, goods accumulated for which 
there were no buyers. A crisis became inevitable. Marx's view of 
depressions, which he was still working out when he died, was roughly 
similar and so, in recent times, has been that of almost everyone. 

However, Marx stressed other causes too. As capital accumulated, the 
rate of return would fall. This would weaken incentives and lead to periods 
of torpor and stagnation. Also, in boom times, the industrial reserve army 
—the unemployed—would be reduced, and the resulting competition for 
labor would force up wage rates, and hence costs of production, and this 
would bring the boom to an end.- Nothing so well suggests Marx's 
intransigent pessimism on the outlook for the worker under capitalism as 


this. A temporary betterment of his position is the cause of a prompt 
worsening of it. Depressions are caused both by the poverty of the workers 
(and their insufficient purchasing power) and equally by temporary 
improvements in their well-being. 

Since the government for Marx was the handmaiden of the 
bourgeoisie, there was small likelihood that it would be impelled to succor 
the unemployed by making jobs for them. But were it to do so, the effect 
would be only to reduce the industrial reserve army, raise wage costs, and 
cause a depression. To correct the deficiency of purchasing power—the 
deficiency that kept workers from buying the products of their labor—by 
public measures to put more purchasing power in the hands of the people, 
as by spending for public works, would be futile for the same reasons. 
Also, there are deeper disorders in the process of "production and 
reproduction" which such superficialities leave untouched and which 
render them worthless. - This point is one of considerable importance to 
Marx and even more to his followers. Were it possible to prevent 
depressions by compensating for the deficient purchasing power of the 
worker with, say, public spending, then capitalism might be workable. 
Instead of revolution, there would be a budget deficit. Acute Marxians 
have seen the danger and denied the possibility of such an easy escape. In 
one of those developments which make economics such an engaging study 
in odd bedfellows, the Marxists were joined in this contention by the most 
stalwart conservatives. 

With the longer-run Marxian prospect, almost everyone is familiar. 
Capitalist concentration proceeds; productive plant and resources come to 
be owned by ever fewer people of ever greater wealth. The Marxian 
capitalist has in fini te shrewdness or cunning on everything except matters 
pertaining to his own ultimate survival. On these, he is not subject to 
education. He continues willfully and reliably down the path to his own 
destruction. The worker, by contrast, whom he degrades and beats to a 
hopeless pulp, is gifted with quick perception and the capacity to learn. He 
is reinforced by "...fresh elements of enlightenment and progress" from the 
sections of the ruling class who are extruded by the process of capitalist 
concentration.- In the end, the centralization of production produces 
hopeless weakness in face of the masses of the workers who by now have 
become a disciplined industrial army. Then the knell sounds and the 
expropriators are expropriated. At the next stage, Marx joins the optimists. 
The path is now open to a laissez-faire more complete by far than that of 


Ricardo. For government was occasioned by the needs of capitalism and 
the acquisitive mentality which capitalism produced. With no further need 
to police the masses or curb the larceny which is the manifestation of 
acquisitive modes of thought, the state can begin to wither away. But first, 
unhappily, there was the revolution. A very large number of people were 
never able to project their minds much beyond this unpleasant prospect. 
And as Marx billed it—"...the forcible overthrow of all existing social 
condition. Let the ruling classes tremble..." -—it was discomforting. 


Nothing has ever been so badly understood as the influence of Marx. That 
he seized the minds of millions is, of course, agreed. But it is widely 
supposed that Marx's influence ended with these faithful. In the 
conventional wisdom, his ideas were a kind of infection, like smallpox. 
Either men got it and were permanently scarred, or they escaped it because 
of some effective inoculation and were untouched. Nothing could be 
further from the truth. Marx profoundly affected those who did not accept 
his system. His influence extended to those who least supposed they were 
subject to it. 

In part, this was the result of the breathtaking grandeur of Marx's 
achievement as an exercise in social theory. No one before, or for that 
matter since, has taken so many strands of human behavior and woven 
them together—social classes, economic behavior, the nature of the state, 
imperialism and war were all here and on a great fresco which depicted 
from deep in the past to far into the future. On class conflict, or 
imperialism, or the causes of national war, Marx was bound to be 
influential, for he was the only man who had offered an explanation which 
was at all integrated with the rest of human experience. Thus all American 
thought has been deeply influenced by a Marxian view of imperialism. The 
break with British imperialism came on economic issues. The principal 
alternative to explaining imperialism in terms of economic self-interest is 
to argue the benevolence of the imperial power, its commitment to the 
white man's burden, its feeling that the natives are not ready for 
independence, its need to protect them from communism. Although this 
latter view had a brief and damaging run in Indochina in the mid-twentieth 
century, even there the suspicion that there might be economic motive 
behind the American intervention was never quite stilled. 


"As an economic theorist Marx was first of all a very learned man."- 
His goals were those of a revolutionist, but his method was that of a 
scholar and scientist. Accordingly, his concepts helped all social scientists 
in their perception of reality. In a world but little removed from poverty, 
and where great store was set by wealth, it was inevitable that most 
conflict would have an economic cause. Nothing else was nearly so worth 
quarreling about. Even where there was some other ostensible cause— 
love, honor, patriotism or religion—a more penetrating or cynical view 
could be expected to discern some economic motive. This, in simple 
outline, was Marx's materialistic conception of history. Though it was not 
original with Marx—as he made clear—he made it famous. It is something 
that even, perhaps especially, the modern conservative accepts. When he 
sees someone agitating for change, either at home or abroad, he inquires, 
almost automatically: "What is there in it for him?" He suspects that the 
moral crusades of reformers, do-gooders, liberal politicians, and public 
servants, all their noble protestations notwithstanding, are based ultimately 
on self-interest. "What," he inquires, "is their gimmick?" 

Marx foresaw, in the process of capitalist concentration, the tendency 
for the control of the capital resources of the community to pass into fewer 
and fewer hands. As the materialistic view of human motivation is 
fundamental in American conservatism, so capitalist concentration is a 
prime tenet of American liberalism. It is Marx, in considerable measure at 
least, who still agitates for the enforcement of the antitrust laws. 

In the central tradition of economic theory, the existence of social 
classes—of capitalists, middle class and proletarians—was only 
surreptitiously conceded if at all. Yet classes obviously existed; so did 
something that looked suspiciously like class conflict. For a perception of 
these matters, the world had also to rely on Marx. 

Finally, Marx gained influence by heralding the truly terrifying 
depression. In the central tradition, as noted, the depression was a routine 
affliction. For Marx, it was an increasingly devastating fact of capitalist 
life. In the end, a depression would destroy (or at least mark the 
destruction of) the system. On this, of all matters, it was difficult to say 
that Marx was wrong, for plainly, by the nineteen-thirties, depressions 
were not routine. In 1934, in the third year of the great depression, John 
Strachey, then the most articulate contemporary English Marxist, surveyed 
the current economic situation and concluded, not without satisfaction, that 


"the whole capitalist world is on its way to barbarism."- But the judgment 
of the most orthodox of English economists in the same year, except in 
being tinged with regret, was not different. Sir Arthur Salter concluded 
that "the defects of the capitalist system have been increasingly robbing us 
of its benefits. They are now threatening its existence. "- 


Had Marx been mostly wrong, his influence would quickly have 
evaporated. The thousands who have devoted their attention to 
demonstrating his errors would have turned their attention elsewhere. But 
on much he was notably right, especially in relation to his time. The latter 
point is worth emphasizing. Most economic philosophers needed only to 
be right as regards their own time. No one defends Adam Smith in his 
conviction that corporations—joint stock companies—had no future. But 
Marxists required that Marx, with some adjustment, be right not only for 
his own time but for all time. This was a truly formidable test. 

And it was because Marx was so manifestly right on some things that 
few could suppress the insistent question: Might he not be right on other 
things—including the prospect for capitalism itself? Might it be that Marx 
faced facts while others sought the dubious shelter of wishful thinking? 
Such thoughts, as much as the convictions of his converts, were the 
measure of Marx's influence. In those who resisted belief, he still had an 
unparalleled capacity to inspire doubts. Lurking just beneath the surface in 
the mind of every non-Marxian—everyone at least who was sensitive to 
any form of thought—was the question: Am I a Pangloss? 

And to this doubt the converts also contributed. Whereas those who 
remained in the central tradition of economics wondered, the Marxists did 
not. They were certain. No wish for a comfortable and nonviolent future 
fathered their thoughts. They were willing to face the prospect of the 
progressive immiseration of the masses, worsening economic crises and, in 
the end, bloody revolution. The unloveliness of these prospects, and the 
fact that they were being faced, established the Marxist as the profound 
realist, the man who was entirely without illusion. This evident realism 
was reinforced by moral passion. "The religious quality of Marxism ... 
explains a characteristic attitude of the orthodox Marxist toward 
opponents. To him, as to any believer in a faith, the opponent is not merely 


in error but in sin. Dissent is disapproved of not only intellectually but also 
morally."— The man who argued with a Marxist was always assaulting a 
rock fortress with a rubber flail. 

Lastly, it was always possible to dismiss those who believed Marx 
wrong as being guilty of a failure of understanding. Marx is not easy to 
understand. Those who thought him wrong had failed to do so. Thus one 
of Marx's reasons for the capitalist crisis, as noted, was the tendency for 
the rate of profit to fall with continuing capital accumulation. Marx was as 
insistent on the importance of profit for investment and production as any 
president of the National Association of Manufacturers. The falling rate of 
profit would lead to recurrent interruptions of expansion and these would 
be of increasing severity and duration. 

In this century, profits have shown no tendency to fall, and capital 
accumulation has continued apace. As a result, the declining rate of profit 
cannot be taken seriously as a cause of depression. One of Marx's 
sympathetic modern interpreters has been moved to conclude that "his 
explanation of the falling tendency of profits explains nothing at all." — But 
few Marxists make this concession. Marx was not in error; nor was it 
because he based his observation on the last century when the rate of 
return seemed to be showing a tendency to fall. Rather, the dissenter has 
failed to see the full subtlety and complexity of Marx's argument. He has 
somehow oversimplified or vulgarized Marx's position. 

Much has been written of the appeal of Marx to intellectuals. How, in 
particular, could a doctrine that had so obviously acquired the standing of 
a dogma be attractive to inquiring, rational minds? The answer is a 
complex one. Apart from the obvious fact that Marx for Marxists was the 
conventional wisdom, there was the seeming realism, the certainty and 
security of the defenders and the large component of vivid truth. But much 
of Marx's strength was always in the contention of his followers that those 
who thought him wrong were really themselves obtuse, simple- or literal¬ 
minded. These were terrible charges; innumerable intellectuals have been 
unwilling to risk them. How much better to persuade oneself and others of 
one's ability to see below the surface. This might mean agreeing that Marx 
meant what he did not say, but it was proof that one wasn't incapably dull. 
Thus acceptance of Marx became not a matter of willingness to follow 
dogma into obvious unreality and error. Rather, it was a question of 
whether the individual was willing to adventure into the subtle and 


inverted as distinct from the surface implications of Marx's words, and had 
the ability to do so. For intellectuals, the lure was strong. This too was a 
source of Marx's influence. 


The time has come for a summing up. Up to, say, the middle years of the 
nineteen-thirties, the broad impact of economic ideas is clear. It could not 
but leave a man with a sense of the depth, pervasiveness and burden of the 
economic problem and, on the whole, with the improbability of a happy 
outcome. "Depend on it," Dr. Johnson observed, "when a man knows he is 
going to be hanged in a fortnight, it concentrates his mind wonderfully."— 
For the same reasons, men's minds were focused on the perils of economic 

In particular, although it was no longer the lesson of the central 
economic tradition that men would starve, neither was it the lesson that 
they would do very well. Privation was still normal. Men might lift 
themselves by lifting their marginal product; with increasing efficiency 
and increasing supplies of capital, marginal productivity and hence wages 
might rise. But no one could suppose that the result could be more than 
barely adequate. Certainly no one could suggest that any opportunity for 
such improvement could be overlooked. On the contrary, to relax such 
effort in the slightest would be extreme social dereliction. The privation, 
already great, would be greater—and unnecessarily so. The man of 
conscience and compassion must see that efficiency is increased by all 
possible means. To do less was to be profoundly callous, even cruel. 

Privation is also enhanced by the intransigent inequality of the income. 
The miserable consumption of the poor is partly the result of the 
ostentatious demands of the rich. There isn't enough for both, and the latter 
get far more than they need. If possible, something should be done about 
inequality, for no sensitive man could be indifferent to the social strains 
and conflicts that it was producing and seemed likely to produce as the 
proletariat became increasingly conscious of its inferior position. But 
could anything serious really be done about it? 

Finally, there was the nerve-wracking problem of insecurity. The 
competitive model made episodic unemployment for the worker, and 


occasional insolvency for the farmer or businessman, a part of the system. 

This insecurity was enhanced by the growing severity of depressions 
and then in the thirties by the most devastating depression of all. This latter 
was especially troublesome because the contemporary theory dismissed it 
as self-correcting. If self-correcting it was inevitable, and if inevitable it 
was intolerable. 

Clearly there was much to bring productivity, inequality and insecurity 
to the center of men's minds and to make them a preoccupying concern. 
And if there was any tendency in the central tradition of economics to 
conclude that all might in the end work out for the best, there were also 
voices from the wings to say it couldn't be so. From the right was the echo 
of the Social Darwinists saying struggle is not only inevitable but good. 
From the Marxist world, in tones of thunderous conviction, came the 
warning that the inequality and the insecurity would increase and increase 
until, in the end, their victims would destroy the whole edifice and, by 
implication, quite a few of its favored inhabitants. 

These—productivity, inequality and insecurity—were the ancient 
preoccupations of economics. They were never more its preoccupations 
than in the nineteen-thirties as the subject stood in a great valley facing, all 
unknowingly, a mountainous rise in well-being. We have now had that 
mountainous rise. In very large measure, the older preoccupations remain. 
We should scarcely be surprised. This pre-eminently is an occasion when 
we would expect the conventional wisdom to lose touch with the reality. It 
has not disappointed us. 

That is not to say that the change has had no effect on conventional 
attitudes. Especially on inequality and insecurity there have been important 
modifications. To these I now turn. 


7. Inequality 

few things have been more productive of controversy over the ages than 
the suggestion that the rich should, by one device or another, share their 
wealth with those who are not. With comparatively rare and usually 
eccentric exceptions, the rich have been opposed. The grounds have been 
many and varied and have been principally noted for the rigorous 
exclusion of the most important reason, which is simply the unwillingness 
to give up the enjoyment of what they have. The poor have generally been 
in favor of greater equality. In the United States this support has been 
tempered by the tendency of some of the poor to react sympathetically to 
the cries of pain of the rich over their taxes and of others to the hope that 
one day soon they might be rich themselves. 

As the last chapters have shown, the economic and social 
preoccupation with inequality is deeply grounded. In the competitive 
society—the society of the central tradition of economics in descent from 
Ricardo—there was presumed to be a premium on efficiency. The 
competent entrepreneur and worker were automatically rewarded. The rest, 
as automatically, were punished for their incompetence or sloth. If labor 
and capital and land were employed with high efficiency then, pro tanto, 
nothing more, or not much more, could be obtained from the economy in 
the short run by way of product. And longer-run progress did not 
necessarily benefit the average man; in the original doctrine, its fruits 
accrued to others. 

So if people were poor, as in fact they were, their only hope lay in a 
redistribution of income, and especially that which was the product of 
accumulated wealth. Much though Ricardo and his followers might 
dissent, there were always some—and the number steadily grew—who 
believed that redistribution might be possible. (Ricardo and those who 
followed him in the central tradition were never immune from the 
suspicion that they were pleading a special interest.) All Marxists took the 
need for a drastic redistribution for granted. Consequently, throughout the 
nineteenth century, the social radical had no choice but to advocate the 
redistribution of wealth and income by one device or another. If he wanted 
to change things, this was his only course. To avoid this issue was to avoid 
all issues. 


The conservative defense of inequality has varied. There has always 
been the underlying contention that, as a matter of natural law and equity, 
what a man has received save by proven larceny is rightfully his. For 
Ricardo and his immediate followers, the luxurious income of landlords 
and of capitalists was the inevitable arrangement of things. One could 
tamper with it but only at the eventual price of disrupting the system and 
making the lot of everyone (including the poor) much worse. 

This was essentially the passive defense. With time (and agitation), the 
case for inequality became a good deal more functional. The undisturbed 
enjoyment of income was held to be essential as an incentive. The 
resulting effort and ingenuity would bring greater production and greater 
resulting rewards for all. In recent times a limit on taxes on earned income 
has been all but canonized. 

Inequality has also come to be regarded as almost equally important 
for capital formation. Were income widely distributed, it would be spent. 
But if it flowed in a concentrated stream to the rich, a part would certainly 
be saved and invested. 

There are other arguments. Excessive equality makes for cultural 
uniformity and monotony. Rich men are essential if there is to be an 
adequate subsidy to education and the arts. Equality smacks of 
communism and hence of atheism and therefore is spiritually suspect. 

The cultural misfortunes from excessive equality cannot be pressed too 
far. As Tawney observed: "Those who dread a dead-level of income or 
wealth ... do not dread, it seems, a dead-level of law and order, and of 
security of life and property. They do not complain that persons endowed 
by nature with unusual qualities of strength, audacity, or cunning are 
prevented from reaping the full fruits of these powers." - And in fact, in 
the conventional wisdom, the defense of inequality does rest primarily on 
its functional role as an incentive and as a source of capital. 

Thus the limited egalitarianism of the present federal income-tax 
structure has long been held to be seriously dampening to individual effort, 
initiative and inspiration or in danger of becoming so. It "destroys 
ambition, penalizes success, discourages investment to create new jobs, 
and may well turn a nation of risk-taking entrepreneurs into a nation of 
softies... "- "It destroys the incentive of people to work ... It makes it 


increasingly difficult, if not impossible, for people to save ... It has a 
deadening effect on the spirit of enterprise ... which has made America. 

However, this case is not impeccably consistent. Not many 
businessmen wish to concede that they are putting forth less than their best 
efforts because of insufficient pecuniary incentive. The typical business 
executive makes his way to the top by promotion over the heads of his 
fellows. He would surely endanger his chance for advancement if he were 
suspected of goldbricking because of his resentment over the inadequacy 
of his after-tax income. He is expected to give his best to his corporation, 
and usually he does. 

To give individuals large incomes to encourage savings also has 
elements of illogic. The rich man saves because he is able to satisfy all his 
wants and then have something over. Such saving, in other words, is the 
residual after luxurious consumption. This obviously is not an especially 
efficient way to promote capital formation. Moreover, the empirical 
evidence on the effect of egalitarianism on capital formation is uncertain. 
England is often cited as an unfortunate example. But Norway, an even 
more egalitarian country, had, following World War II, one of the highest 
rates of capital formation and of economic growth of any country in the 
non-Communist world. - Latin American republics with a highly unequal 
income distribution have no remarkable record for capital formation. 

The formal liberal attitude toward inequality has changed little over the 
years. The liberal has partly accepted the view of the well-to-do that it is a 
trifle uncouth to urge a policy of soaking the rich. Yet, on the whole, the 
rich man remains the natural antagonist of the poor. Economic legislation, 
above all tax policy, continues to be a contest, however unequal, between 
the interests of the two. No other question in economic policy is ever so 
important as the effect of a measure on the distribution of income. The test 
of the good liberal is still that he is never fooled, that he never yields on 
issues favoring the wealthy. Other questions occupy his active attention, 
but this is the constant. Behind him, always challenging him, is the cynical 
Marxian whisper hinting that whatever he does may not be enough. 
Despite his efforts, the wealthy become wealthier and more powerful. 
They lose battles but win wars. 



However, few things are more evident in modern social history than the 
decline of interest in inequality as an economic issue. This has been 
particularly true in the Unite States. And it would appear, among western 
countries, to be the least true of the United Kingdom. While it continues to 
have a large ritualistic role in the conventional wisdom of conservatives 
and liberals, inequality has ceased to preoccupy men's minds. And even 
the conventional wisdom has made some concessions to this new state of 

On the fact itself—that inequality is of declining concern—it is only 
necessary to observe that for many years no serious effort has been made 
to alter the present distribution of income.- Although in the semantics of 
American liberalism there is often a tactful silence on the point, since 
nothing so stirs conservative wrath, the principal public device for 
redistributing income is the progressive income tax. But the income tax in 
the years since World War II has greatly regressed as an instrument for 
income redistribution. 

The decline in concern for inequality cannot be explained by the 
triumph of equality. Although this is regularly suggested in the 
conventional wisdom of conservatives, and could readily be inferred from 
the complaints of businessmen, inequality is great and getting greater. In 
1970, the one-tenth of families and unattached individuals with the lowest 
incomes received before taxes about 2 percent of the total money income 
of the country; the tenth with the highest incomes received 27 percent of 
the total, which is to say their incomes averaged 14 times as much as the 
lowest tenth. The half of the households with the lowest incomes received, 
before taxes, only 23 percent of all money income. The half with the 
highest incomes received 77 percent. In 1972, only about 7 percent of all 
family units had incomes before taxes of more than $25,000. They 
received, nonetheless, 21 percent of total income. At the other extreme, 17 
percent had before-tax incomes of less than $5,000 and received only 4 
percent of the income.- In the years since, the share going to the very rich 
has much increased. Present laws are notably favorable to the person who 
has wealth as opposed to the individual who is only earning it. With a little 
ingenuity, the man who is already rich can ordinarily take his income in 
the form of capital gains and limit somewhat his tax liability. In addition, 
unlike the man who must earn, he is under no compulsion to acquire a 
capital stake, either for old age, family, or the mere satisfaction it brings, 
since he already has one. Accordingly, he need not save. Yet none of these 


matters nor the numerous more egregious loopholes in the federal income 
tax arouse the kind of concern which leads on from rhetoric to action. 


The first reason inequality has faded as an issue is, without much question, 
that while it has continued and increased, it has not been showing the 
expected tendency to promote violent reaction. And thus the Marxian 
prediction, which earlier in this century seemed so amply confirmed by 
observation, no longer inspires the same depth of fear. In the absence of 
alarm, inequality is more easily accepted than social reformers in the past 
have supposed. Emulation or, when this is frustrated, envy has long played 
a large role in the common view of human motivation.- So long as one 
individual had more than another, the second was presumed to be 
dissatisfied with his lot. He strove to come abreast of his more favored 
contemporary; he was deeply discontented if he failed. However, these 
disenchanting traits are less cosmic than has commonly been supposed. 
Envy almost certainly operates efficiently only as regards near neighbors. 
It is not directed toward the distant rich. If the individual's own real 
income is rising, the fact that unknown New Yorkers, Texans or West 
Coast computer entrepreneurs are exceedingly wealthy is not, probably, a 
matter of prime urgency. It becomes easy, or at least convenient, to accept 
the case of the conventional wisdom, which is that the rich in America are 
both functional and also much persecuted members of the society. And, as 
noted, to comment on the wealth of the wealthy, and certainly to propose 
that it be reduced, has come to be considered bad taste. The individual 
whose own income is going up has no real reason to incur the opprobrium 
of this discussion. Why should he identify himself, even remotely, with 
soapbox orators, malcontents, agitators and other undesirables? 


Another reason for the decline in interest in inequality, almost certainly, is 
the drastically altered political and social position of the rich in recent 
times. Broadly speaking, there are three basic benefits from wealth. First is 
the satisfaction in the power with which it endows the individual. Second 
is that in the physical possession of the things which money can buy. Third 
is the distinction or esteem that accrues to the rich man as the result of his 


wealth. All of these returns to wealth have been greatly circumscribed in 
the last seventy-five years and in a manner which also vastly reduces the 
envy or resentment of the well-to-do or even the knowledge of their 

As recently as the nineteen-twenties, the power of the great business 
firm was paramount in the United States and the firm, in turn, was the 
personification of the individual who headed it. Men like Morgan, the 
Rockefeller executives, Hill, Harriman and Hearst had great power in the 
meaningful sense of the term, which is to say that they were able to direct 
the actions and command the obedience of countless other individuals. 

In the last seventy-five years, the power and prestige of the United 
States government have increased. If only by the process of division, this 
diminished the prestige of the power accruing to private wealth. But, in 
addition, it also meant some surrender of authority to Washington. 
Furthermore, trade unions invaded the power of the entrepreneur from 
another quarter. But most important, the professional manager or executive 
took away from the man of wealth the power that is implicit in running a 
business. Seventy-five years ago Morgan, Rockefeller, Hill, Harriman and 
the others were the undisputed masters of the business concerns they 
owned, or it was indisputably in their power to become so. Their sons and 
grandsons still have the wealth, but with rare exceptions the power implicit 
in the running of the firm has passed to professionals.- 

When the rich were not only rich but had the power that went with 
active direction of corporate enterprise, it is obvious that wealth had more 
perquisites than now. For the same reasons, it stirred more antagonism. J. 
P. Morgan answered not only for his personal wealth but also for the 
behavior of the United States Steel Corporation which he had put together 
and which ultimately he controlled. As a man of corporate power, he was 
also exceedingly visible. Today no sins of similar corporations are visited 
on their owners, for the latter do not manage the company and almost no 
one knows who they are. When the power that went with active business 
direction was lost, so was the hostility. 

The power that was once joined with wealth has been impaired in a 
more intimate way. In 1194, the crusading knight Henry of Champagne 
paid a visit to the headquarters of the Assassins at the castle at al-Kahf on 
a rugged peak in the Nosairi Mountains. The Assassins, though a fanatical 


Moslem sect, had, in general, been on good terms with the Christians, to 
whom they often rendered, by arrangement, the useful service of resolving 
disputes by eliminating one of the disputants. Henry was sumptuously 
received. In one of the more impressive entertainments, a succession of the 
loyal members of the cult, at a word from the Sheik, expertly immolated 
themselves. Before, and ever since, the willing obedience of a household 
coterie has been a source of similar satisfaction to those able to command 
it. Wealth has been the most prominent device by which it has been 
obtained. As may indeed have been the case at al-Kahf, it has not always 
endeared the master to the men who rendered it. 

In any case, such service requires a reservoir of adequately obedient or 
servile individuals. The drying up of this reservoir, no less than the loss of 
wealth itself, can rob wealth of its prerogatives. The increase in the 
security and incomes of Americans at the lower income levels has 
effectively reduced—indeed, for many purposes, eliminated—the servile 
class. And again the reciprocal is that those who no longer work for the 
rich (or who have done so or who fear that they might be forced to do so) 
no longer feel the resentment which such dependence has induced. 


The enjoyment of physical possession of things would seem to be one of 
the prerogatives of wealth which has been little impaired. Presumably 
nothing has happened to keep the man who can afford them from enjoying 
his Rembrandts and his home-grown orchids. But enjoyment of things has 
always been intimately associated with the third prerogative of wealth, 
which is the distinction that it confers. In a world where nearly everyone 
was poor, this distinction was very great. It was the natural consequence of 
rarity. In England, it is widely agreed, the ducal families are not uniformly 
superior. There is a roughly normal incidence of intelligence and stupidity, 
good taste and bad, and morality, immorality, homosexuality, and incest. 
But very few people are dukes or even duchesses, although the latter have 
become rather more frequent with the modern easing of the divorce laws. 
As a result, even though they may be intrinsically unexceptional, they are 
regarded with some residual awe. So it has long been with the rich. Were 
dukes numerous, their position would deteriorate irretrievably. As the rich 
have become more numerous, they have inevitably become a debased 


Moreover, wealth has never been a sufficient source of honor in itself. 
It must be advertised, and the normal medium is obtrusively expensive 
goods. In the latter part of the last century in the United States, this 
advertisement was conducted with virtuosity. Housing, equipage, female 
adornment and recreation were all brought to its service. Expensiveness 
was keenly emphasized. "We are told now that Mr. Gould's '$500,000 
yacht' has entered a certain harbor, or that Mr. Morgan has set off on a 
journey in his '$100,000 palace car,' or that Mr. Vanderbilt's '$2,000,000 
home' is nearing completion, with its '$50,000 paintings' and its '$20,000 
bronze doors.'"- The great houses, the great yachts, the great balls, the 
stables, and the expansive jewel-encrusted bosoms were all used to 
identify the individual as having a claim to the honors of wealth. 

Such display is now passe. There was an adventitious contributing 
cause. The American well-to-do have long been curiously sensitive to fear 
of expropriation—a fear which may be related to the tendency for even the 
mildest reformist measures to be viewed, in the conservative conventional 
wisdom, as the portents of revolution. The depression and especially the 
New Deal gave the American rich a serious fright. One consequence was 
to usher in a period of marked discretion in personal expenditure. Purely 
ostentatious outlays, especially on dwellings, yachts and associated 
females, were believed likely to incite the masses to violence. They were 
rebuked as unwise and improper by the more discreet. It was much wiser 
to take on the protective coloration of the useful citizen, the industrial 
statesman or even the average guy.— 

However, deeper causes were at work. Increasingly, in the last quarter 
century, the display of expensive goods, as a device for suggesting wealth, 
has been condemned as vulgar. The term is precise. Vulgar means: "Of or 
pertaining to the common people, or to the common herd or crowd." And 
this explains what happened. Lush expenditure could be afforded by so 
many that it ceased to be useful as a mark of distinction. An elongated, 
richly upholstered and extremely high-powered automobile conveys no 
impression of wealth in a day when such automobiles are mass-produced 
by the thousands. A house in Palm Beach is not a source of distinction 
when the rates for a thousand hotel rooms in Miami Beach rival its daily 
upkeep. Once a sufficiently impressive display of diamonds could create 
attention even for the most obese and repellent body, for they signified 
membership in a highly privileged caste. Now the same diamonds are 
afforded by a television star or a talented harlot. Modern mass 


communications, especially the movies and television, ensure that the 
populace at large will see the most lavish caparisoning on the bodies not 
only of the daughters of the rich but also on the daughters of coal miners 
and commercial travelers who have struck it rich by their own talents or 
some facsimile thereof. In South America, in the Middle East, to a degree 
in India, and by travelers therefrom in Nice, Cannes and Deauville, 
ostentatious display by those of wealth is still practiced. This accords with 
expectations. In these countries, most people are still, in the main, poor 
and unable to afford the goods which advertise wealth. Therefore, 
ostentation continues to have a purpose. In not being accessible to too 
many people, it has not yet become vulgar. 

The American of wealth is not wholly without advantages in his search 
for distinction. Wealth still brings attention if devoted to cultural and 
technical pursuits or to hobbies with a utilitarian aspect. A well-to-do 
American may gain in esteem from an admirably run farm, although never 
from an admirably manicured estate. Although wealth aids a public career, 
those who too patently rely on it are regarded as slightly inferior public 
citizens. A Rockefeller or a Kennedy who is elected to public office enjoys 
a prestige far in excess of an Aldrich or an Annenberg whose appointment 
to an ambassadorial position, however justified on merit, might have been 
less certain in the absence of sizable campaign contributions. In sum, 
although ostentatious and elaborate expenditure, in conjunction with the 
wealth that sustained it, was once an assured source of distinction, it is so 
no longer. The effect on attitudes toward inequality will be evident. 
Ostentatious expenditure focused the attention of the poor on the wealth of 
the wealthy, for this of course was its purpose. With the decline of 
ostentation, or its vulgarization, wealth and hence inequality were no 
longer flagrantly advertised. Being less advertised, they were less noticed 
and less resented. The rich had helped to make inequality an issue. Now 
they were no longer impelled to do so. 

There were similar consequences from the fact that the rich man now 
had to compete for esteem. Once the intellectual, politician or man of 
general ambition saw the rich man achieve distinction without effort and in 
contrast with his own struggle. He reacted by helping to focus the 
resentment of the community as a whole. Now he saw the man of wealth 
forced to compete for his honors. In this competition, the rich man retained 
undoubted advantages, but he did not automatically excel. Nothing could 
operate more effectively to dry up the supply of individuals who otherwise 


would make an attack on inequality a career. By graduating into the ranks 
of the professional managers, and after making his way up through the 
hierarchy of the modern corporation, the ambitious man could expect to 
compete on tolerably equal terms with the grandson of the founder. 

It would be idle to suggest that the man of wealth has no special 
advantages in our society. Such propositions are the one-day wonders of 
the conventional wisdom, and those who offer them have a brief but 
breathtaking reputation as social prophets. This itself suggests that such 
findings assuage some sense of guilt. But it does seem clear that prestige 
and power are now far more intimately identified with those who, 
regardless of personal wealth, administer productive activity. The high 
corporate official is inevitably a man of consequence. The rich man can be 
quite inconsequential and often is. His need to achieve success in the 
nominally popular profession of government is instructive. 


In the Ricardian world, as noted, progress required profits, and its fruits 
accrued to the landlords. Economic advance — expanding output — did 
not ordinarily help the common man. His only hope lay in reforms that 
Ricardo and his followers would have considered highly destructive or, 
alternatively, in a drastic overthrow of the system. Economic advance still 
holds little promise of betterment for the average man in many countries. 
On Andean haciendas, it matters little to the man who tills the land 
whether the product increases. His own share is minute; an increase in 
product is notimportant if all but a minute fraction goes to someone else. 
And matters may be worse: any surplus over the barest need may be 
absorbed, as the result of an ad hoc revision of the rules, by the landlord, 
merchant or moneylender. This is still the Ricardian world, and in it the 
obvious hope for improvement lies in a different distribution of income 
based on a different social structure. For the same reason, until the share of 
the ordinary man in the product is increased, his incentive to increase 
production—to adopt better methods of cultivation, for example—is slight 
or nil. The people of numerous of the poor countries have frequently heard 
from their presumptively more advanced mentors in the economically 
more advanced lands that they should be patient about social re-form, with 
all its disturbing and even revolutionary implications, and concentrate on 
increasing production. It can be remarkably inappropriate advice. Reform 


is not something that can be made to wait on productive advance. It may 
be a prerequisite to such advance. 

In the advanced country, in contrast, increased production is an 
alternative to redistribution. And, as indicated, it has been the great solvent 
of the tensions associated with inequality. Even though the latter persists, 
the awkward conflict which its correction implies can be avoided. How 
much better to concentrate on increasing output, a program on which both 
rich and poor can agree, since it benefits both. 

That among those who might be subject to redistribution this doctrine 
has something approaching the standing of divine revelation is perhaps not 
entirely surprising. For many years, the relationship of businessmen to 
economists in the United States was characterized by a degree of 
waspishness. The economist had shown a predisposition to favor low 
tariffs, the income tax, the antitrust laws and, quite frequently, trade 
unions. This made him, at a minimum, an inconvenient friend. But 
increased output as a substitute for greater equality was the basis for a 
notable rapprochement. "From a dollars-and-cents point of view it is quite 
obvious that over a period of years, even those who find themselves at the 
short end of inequality have more to gain from faster growth than from any 
conceivable income redistribution." — 

These statements still arouse some suspicion. Over the centuries, those 
who have been blessed with wealth have developed many ingenious and 
persuasive justifications of their good fortune. The instinct of the liberal is 
to look at these explanations with a rather unyielding eye. Yet, in this case, 
in the advanced countries, the facts are inescapable. It is the increase in 
output in recent decades, not the redistribution of income, which has 
brought the great material increase in the well-being of the average person. 
And, however suspiciously, the liberal has come to accept the fact. As a 
result, the goal of an expanding economy has also become deeply 
embedded in the conventional wisdom of the American left. The 
beneficent effects of such an economy, moreover, are held to be 
comprehensive. Not only will there be material improvement for the 
average man, but an end to poverty and privation for all. This latter is 
untrue. Increasing aggregate output leaves a self-perpetuating margin of 
poverty at the very base of the income pyramid. This goes largely 
unnoticed, because it is the fate of a voiceless minority.— And liberals 
have long been accustomed to expect the poor to speak in the resounding 


tones of a vast majority. To these matters, it will be necessary to return. 

For the moment, we need only notice that, as an economic and social 
concern, inequality has been declining in urgency, and this has had its 
reflection in the conventional wisdom. The decline has been for a variety 
of reasons, but, in one way or another, these are all related to the fact of 
increasing production. Production has eliminated the more acute tensions 
associated with inequality. And it has become evident to conservatives and 
liberals alike that increasing aggregate output is an alternative to 
redistribution or even to the reduction of inequality. The oldest and most 
agitated of social issues, if not resolved, is at least largely in abeyance, and 
the disputants have concentrated their attention, instead, on the goal of 
increased productivity. This is a change of far-reaching importance. Our 
increased concern for production in modern times would be remarkable in 
itself. But it has also pre-empted the field once occupied by those who 
disputed over who should have less and who should have more. 


8. Economic Security 

few matters having to do with economic life have been so much 
misunderstood as the problem of economic security. And, in remarkable 
degree, the misunderstanding persists. 

In the model of the competitive society, such insecurity was inherent. 
The individual producer or worker might, at any time, suffer a sudden 
decline in his fortunes. This could be the result of laziness or 
incompetence which would lose him his customers or his job. But the best 
of men might suffer from a sudden change in consumer tastes or as the 
result not of their own inadequacy but of that of their employer. These 
unpredictable changes in fortune were both inevitable and useful. They 
were inevitable, for they were part of the capacity of the system to 
accommodate itself to change. As requirements and wishes changed, men 
were employed in new places and disemployed in the old. Capital was 
sought in the new industries and written off as a loss in the old. The 
insecurity was useful because it drove men—businessmen, workers, the 
self-employed—to render their best and most efficient service, since 
severe punishment was visited impersonally on those who did not. 

However, this insecurity, valuable though it seemed in principle, was 
cherished almost exclusively either in the second person or in the abstract. 
Its need was thought urgent for inspiring the efforts of other persons or 
people in general. It seldom seemed vital for the individual himself. 
Restraints on competition and the free movement of prices, the greatest 
source of uncertainty to business firms, have been principally deplored by 
university professors on lifetime appointments. Their security of tenure is 
deemed essential for fruitful and unremitting thought. The preoccupation 
of workers with unemployment insurance or old age pensions has usually 
seemed most supine and degenerate to business executives who would be 
unattracted by companies in which they were subject to arbitrary discharge 
or which lacked adequate pension arrangements. Farmers have been 
regularly reproached for their lack of fealty to the free price system by 
entrepreneurs whose own prices have not suffered reduction for some 

In the conventional wisdom of conservatives, the modern search for 
security has long been billed as the greatest single threat to economic 


progress. These fears were strongest at a time when great advances in 
social security were coinciding with great economic expansion. For older 
liberals, the prospect for finding new forms of social protection with wide 
appeal to the masses remains the highest hope for winning both social 
progress and political success. When liberal politicians in the United States 
deplore, as they regularly do, their lack of new ideas, they have reference, 
almost invariably, to the lack of new and politically attractive forms of 
social security. This is disconcerting to conservatives who also suppose 
that an endless number of new ideas for protecting the individual from 
economic misfortune are lurking just around the corner. There have been 
few really new proposals for many years. 


The first step in penetrating this bedlam is to recognize that while risk was 
indeed inherent in the economic society of the central tradition, it has long 
been regarded with equanimity by almost no one. And all who were 
subject to insecurity sooner or later set about eliminating it as it affected 
themselves. In large measure, they were successful. The devices by which 
they did so have varied much. This has led those who were using one 
device to see it as a necessary precaution while they deplored the 
iniquitous measures devised by others. And, as will by now be scarcely 
surprising, while insecurity was eliminated in the real world, it survived 
more or less intact in the ideological underpinning of the conventional 
wisdom and continued therein to play its all but indispensable role. 

The elimination of economic insecurity was pioneered by the business 
firm in respect of its own operations. The greatest source of insecurity, as 
noted, lay in competition and the free and unpredictable movement of 
competitive market prices. From the very beginning of modem capitalist 
society, businessmen have addressed themselves to the elimination or the 
mitigation of this source of insecurity. Monopoly or the full control of 
supply, and hence of price, by a single firm was the ultimate security. But 
there were many very habitable halfway houses. Price and production 
agreements or cartels, price-fixing by law, restrictions on entry of new 
firms, protection by tariffs or quotas, and many other devices have all had 
the effect of mitigating the insecurity inherent in the competitive economy. 
Most important, where the number of firms is small, a characteristic 
feature of the modern industry, interdependence is recognized and 


respected, and firms stoutly avoid price behavior which would enhance 
uncertainty for all. 

These efforts have been long and widely remarked. However, the 
tendency of these measures to focus directly or indirectly on price, which, 
as stated, is the greatest source of uncertainty, has led economists to regard 
the management of prices as being of unique importance. And they have 
far more frequently related such management to the maximization of 
profits than to the minimization of risks. The specter that for long haunted 
the economist was the monopoly seeking extortionate gains at the public 
expense. This dominated his thoughts. The less dramatic figure, the 
businessman seeking protection from the vicissitudes of the competitive 
economy, was much less in his mind. That is unfortunate, for the 
development of the modern business enterprise can be understood only as 
a comprehensive effort to reduce risk. It is not going too far to say that it 
can be understood in no other terms. 

Specifically, it falls within the power of the modern large corporation 
to mitigate or eliminate many of the more important risks to which 
business enterprises have anciently been subject. Consumer taste and 
demand may shift. The modern large corporation resists this by its 
advertising. Consumer taste is thereby brought partly under its control. 
Size makes possible a diversified line. This provides further protection. 
There is danger that technological change will render obsolete a product or 
method of production. The modern corporation is able, through its research 
and technological resources, to ensure that it will be abreast of such 
change. Therefore, technological change will occur under its own auspices 
or within its reach. A measure of control over prices means a measure of 
control over earnings. This means at least partial independence of the 
capital market for funds. Size, moreover, greatly diversifies the 
opportunities of the firm in raising money. In the large organization, even 
the risks associated with the selection of leadership are reduced. 
Organization replaces individual authority; no individual is powerful 
enough to do much damage. Were it otherwise, the stock market would 
pay close attention to retirements, deaths and replacements in the 
executive ranks of the large corporations. In fact, it mostly ignores such 
details in tacit recognition that the organization is independent of any 
individual. - 

The massive reduction in risk that is inherent in the development of the 


modern corporation has been far from fully appreciated. This is partly 
because the corporation, unlike the worker, farmer or other individual 
citizen, has been largely able to reduce its insecurity without overtly 
seeking the assistance of government. It has required elaborate 
organization, but this has been the product of continuous evolution from 
the original entrepreneurial enterprise. Farmers, workers and other 
citizens, by contrast, have had openly to seek the assistance of government 
or (as in the case of the unions) they have had to organize specially for the 
purpose of reducing insecurity. Consequently, their search for greater 
security has been notorious. By contrast, the corporate executive, whose 
concern pioneered the escape from insecurity, has been able to suppose 
that security is something with which only workers or farmers are 

Myth has also played a part in concealing the effort of the modern 
corporation to minimize insecurity. There is a surviving conviction, even 
on the part of the executives of the largest business corporations, that they 
live dangerously. Almost no large industrial corporation in the United 
States, which is also large in its industry, has failed or been seriously in 
danger of insolvency in many years. Where there has been danger, the 
government has come to the rescue. The security of tenure of corporation 
executives is remarkably high. So is their remuneration. Certainly these 
bear no resemblance to the insecurity of the fortunes of the business 
entrepreneur of the competitive model. Individual decisions of corporate 
management may still turn out to have been wrong. But in the large, 
diversified corporation—in contrast with the small and more specialized 
firm—such decisions are rarely fatal. 

The riskiness of modern corporate life is, in fact, the harmless conceit 
of the modern corporate executive, and that is why it is vigorously 
proclaimed. Precisely because he lives a careful life, the executive is 
moved to identify himself with the dashing entrepreneur of economic 
literature. For much the same reason, the commander of an armored 
division, traveling in a trailer and concerning himself with gasoline 
supplies, sees himself as leading an old-time cavalry charge. Nothing has 
been more central to the purpose of General Motors or General Electric 
than to encompass and eliminate the perils to which the onetime 
entrepreneur was presumed to be subject. Nothing would be more 
damaging to an executive reputation in General Motors or General Electric 
than to launch a product without testing the market, to be caught napping 


by a technological development, to be unprotected on one's raw material 
supply or to be caught in a foolish price war. These were once the 
commonplace risks of entrepreneurship. 

But the large corporation has been only the leader in the retreat from 
risk. Nearly everyone else has participated to the best of his ability and 
ingenuity, and in the nineteen-thirties there was an especially widespread 
effort to mitigate the economic perils of the average man or woman. The 
federal government intervened for the first time with relief and welfare 
funds to protect the individual from economic misfortune. This was 
followed by social security—unemployment insurance and old age and 
survivor's pensions. Farmers, through public payments and support prices, 
were protected from some of the insecurity associated with competitive 
market prices. The unions developed rapidly during this decade. Along 
with their redress of bargaining power, they provided the worker with 
protection against capricious or adventitious firing or demotion and thus 
increased his security in his job. Pensions, health insurance, supplementary 
unemployment compensation have added to the protection. Even the 
smaller businessman, through the Robinson-Patman Act, the Fair Trade 
laws, legislation against below-cost selling, and through trade associations, 
won a measure of security from the uncertainties of market competition for 
which he shared the universal distaste. 

The foregoing measures were microeconomic. They protected the 
individual, firm or group from the specific adversities to which it was 
subject. But the effective mitigation of insecurity required another and 
parallel effort of a far more general sort. The position of the worker who is 
protected against arbitrary firing by a sound seniority system is far from 
ideal if he receives an entirely nondiscriminatory discharge as the result of 
an insufficiency of demand for the product he is making. This is especially 
so if a general shortage of demand keeps him from finding a job 
elsewhere. While unemployment compensation is better than nothing, a 
job is better than either. Even with an effective enforcement of the laws 
preventing price discrimination—roughly the use by a large firm of its size 
to exact and offer prices which small competitors cannot obtain or quote— 
the competitive position of the small retailer in a time of depression is not 
happy. Regardless of the conditions of competition, it is much better when 
the demand for everyone's product is good. Farm support prices are a 
useful protection against sudden adverse price movements. But a demand 
for farm products that holds such prices reliably above support levels will 


be preferred by every rational farmer. 

At a time, as during the thirties, when there was great interest in the 
microeconomic measures to increase security, it would have been 
surprising indeed had there been no macroeconomic effort with its greater 
efficiency to the same end. The two efforts would be in the highest degree 
complementary. In fact, the reduction of insecurity by macroeconomic 
measures was central in the economic policy of the time. Efforts to 
eliminate or mitigate the business cycle and to stabilize the economy 
became a principal goal of public policy. Then, as since, economic 
stabilization was regarded as an end in itself, but it will now be clear that it 
was only one part of the broad effort to escape the insecurity which was 
assumed to be inherent in economic life. The change in attitudes on 
macroeconomic security during the thirties was remarkable. At the 
beginning of the decade, it was almost uniformly assumed that cyclical 
fluctuations with accompanying price and employment uncertainties were 
inevitable. It was hoped by many that they would not be violent. But there 
was no general confidence that depressions could be tempered by 
government action without the risk of either eliminating the self-corrective 
features of the cycle or simply making things worse. By the end of the 
decade, under the combined influence of John Maynard Keynes and the 
sanguine and experimental mood generated by the New Deal, there was a 
widespread belief that depressions could be at least partially prevented. 
The notion that they should be allowed to run their course was virtually 


The nineteen-thirties were a remarkable period and the changes to enhance 
security in this time still call for reflection. They were numerous and 
massive in their effect, and they were concentrated in the brief span of a 
few years. (While it is convenient to speak of a decade, most of the drive 
for increased economic security occurred in the five years from 1933 to 
1938.) Conservatives and liberals alike looked at the measures, and at the 
mass approval they evoked, and concluded that something new and 
different had been added in economic motivation. Conservatives 
struggling to reconcile this drive for security with the inherent and 
seemingly indispensable insecurity of the competitive society were 
profoundly alarmed. For perhaps the first time in history, they worried not 


about the turbulent ambitions of the masses but about their yearning for 
peace and contentment. Liberals, observing the political magic in this 
desire for security, accepted it and rationalized it. Modern industrial life, 
they concluded, was a thing of exceptional hazard; the worker lived in 
constant danger of being tom to pieces by the increasingly complex social 
machine which he served. Given this image, it was possible to argue that 
he needed much more elaborate protection than in the simpler economic 
society assumed by earlier economists. These men could not have foreseen 
the risks of advanced industrial capitalism. With further advance, ever 
more protection would be required. 

We have since come to see the matter in a clearer light. In this time of 
change, the average man was simply showing the commonplace reaction 
to the insecurity of the competitive system. In doing so, he was following a 
path that had been pioneered by the modern business firm. He was 
showing, as ever, that insecurity is something that is cherished only for 

It was inevitable that farmers and workers in general would be the last 
to concern themselves with security. Before a man will try to protect 
him self from sudden changes in his economic fortune, he must have some 
fortune to protect. Businessmen were the first to develop a stake in 
economic society. They were the first, as a result, to become concerned 
with means, explicit or unrecognized, for safeguarding that stake. In the 
grim world of Ricardo and Malthus, the ordinary citizen could have no 
interest in social security in the modern sense. If a man's wage is barely 
sufficient for existence, he does not worry much about the greater 
suffering of unemployment. Life is a heavy burden in either case. Men 
who are engaged in a daily struggle for survival do not think of old age, for 
they do not expect to see it. When the normal expectation of life is very 
low, sickness and death are normal hazards. A man of eighty does not take 
out life insurance. He reconciles himself as best he can to the prospect of 
death. To the landless worker in an Indian village, unemployment is not 
even a misfortune. It is his normal lot. 

With increasing well-being, all people become aware, sooner or later, 
that they have something to protect. In the very early stages of the 
evolution of a business concern, the entrepreneur is not much concerned 
with security. He has little equity to conserve. Only later do he or his 
descendants begin to talk about their responsibilities to their stockholders. 


Henry Ford and James Couzens could gamble on the untested idea of 
producing in a single model the cheapest possible car for the people. It was 
a breathtaking step. But they had nothing much to lose. Ford executives 
would now be derelict were they similarly to risk the present assets of the 
Ford Motor Company. No criticism attaches to the effort of the modern 
corporation to minimize risk. It would be delinquent in its responsibilities 
if it failed to do so. It would be gambling where it could be sure. 

The development in the labor market is similar. As the real wage of the 
worker increases and also as employment becomes more certain, 
unemployment and the absence of income acquires its contrasting horror. 
With increasing income, it also becomes possible to think of old age; the 
individual expects to survive, and old age without income is differentiated, 
as it was not before, by the prospect of discomfort. And as health hazards 
and the dangers of accident decline, men come to think of them as 
abnormal rather than normal afflictions. It is not the poor but the well-to- 
do farmers who find onerous the uncertainties of the market. In the 
mountain country of Kentucky and Tennessee, a depression is not a 
grievous hazard. Farmers have little to sell; their property has small value. 
They are therefore little affected by declining prices and not much 
concerned about declining property values. In the well-to-do regions, 
things are different. In the nineteen-thirties, it was comparatively rich 
farmers of Iowa who threatened with a rope the judges who presided over 
foreclosure proceedings. From these farms came the demands for farm 
relief. Unlike those of the Appalachian Plateau, these farmers had 
something to lose. 

Thus the notion, so sanctified by the conventional wisdom, that the 
modern concern for security is the reaction to the peculiar hazards of 
modern economic life could scarcely be more in error. Rather, it is the 
result of improving fortune—of moving from a world where people had 
little to one where they had much more to protect. In the first world, 
misfortune and suffering were endemic and unavoidable. In the second, 
they have become episodic and avoidable. And as they became episodic 
and avoidable, reasonable men saw the merit of measures to avoid them 
and the possibilities for so doing. 

Increased economic well-being was not the sole cause of the increased 
interest in economic security. Allowances must be made for differences in 
national temperament and political development. These may well explain 


why a comprehensive system of social insurance first appeared in Imperial 
Germany and why, in the non-Communist lands, it has had its greatest 
development in Scandinavia and the United Kingdom. The great 
depression which struck with especial severity in the United States and 
Canada brought the interest in economic security in these countries abreast 
of that in the European industrial nations. 

The great depression has, in fact, often been cited as evidence of the 
growing insecurity of modern industrial life. There was, it is said, no 
comparable hazard before the Industrial Revolution. This, it will now be 
clear, is a superficial view. The great depression was severe partly because 
there was so much wealth and income to lose. The hazard was greatest in 
the United States and Canada where the per capita wealth was greatest. 
And the depression stimulated concern for economic security in precisely 
the same way that a conflagration stimulates an interest in fire insurance 
and a flood in flood control. These also have an effect on individuals 
which is roughly proportionate to the amount of their property that lies in 
the path of the flames or the water. 


Men of property—the Forsytes of the world—have always known that it is 
as important to safeguard their wealth as to increase it. But they have never 
equated the two. Property can be increased without limit; the efforts to 
safeguard it are subject to sharply diminishing returns. Having insured 
against fire, theft and high winds, a man has removed the major hazards to 
his possessions. Protection against earthquakes and falling airplanes may 
also be worthwhile, but it is not of equal urgency and it does not bring an 
equivalent increase in peace of mind. 

The problem of economic security is much the same. There are more 
serious hazards and less serious ones; as the more serious are covered, 
there will be a declining sense of urgency about the less serious ones and 
indeed, also, about the entire problem of economic security. For the 
worker, in the past, the greatest hazard was the loss of his job and income. 
Thereafter, the uncertainties of old age, sickness, accident and death may 
be assumed to have ranked next in importance. As and when these risks 
were mitigated, although others remained, none was of comparable 
importance. For the farmer, protection against a severe decline in his 


prices was (and remains) of paramount urgency. Such a decline threatens 
both his income and his assets. After that, depending on the region, comes 
the danger of drought and crop failure. There are no other hazards of 
similar importance. For the businessman, the situation is much the same. 
The overwhelming uncertainty concerns product prices and markets. This 
accounts for the attention it has received from economists, indeed why, in 
the theory of market behavior, efforts to remove this dimension of risk 
have been regarded as more or less unique and also, not infrequently, as 
uniquely reprehensible. There are further hazards—those of technological 
change, cost movements, raw material supplies, labor relations—which it 
is desirable to eliminate, but their potential for damage may be less 
devastating. Other sources of uncertainty are of still less importance. 

The meaning of this is that elimination of insecurity in economic life 
can be a finished business. Nothing is more completely accepted in the 
conventional wisdom than the cliche that economic life is endlessly and 
inherently uncertain. In fact, the major uncertainties of economic life 
(subject to some marked caution concerning the control of depression and 
inflation) have already been eliminated. The ones that remain are of much 
reduced urgency. 

The corollary is that parties and governments cannot, as the 
conventional wisdom so devoutly assumes, go on "inventing" new kinds of 
security. This would be possible were it merely a matter of invention or 
were the hazards of modern economic life increasing. But the hazards are 
finite in number; they increase only in the sense that people have more to 
lose. This is not to say that no economic insecurity remains. For many 
individuals of working age in the United States, sickness—which may 
mean large expenditures at a time when there is no income—is still a 
hazard. Smaller business and agriculture are still insecure vocations. 
Nonetheless, subject always to the major qualification that depression and 
severe inflation are to be prevented, the preoccupation with new forms of 
economic security is over. No hazards remain that are comparable in 
importance with those that have been covered. And protection once 
achieved is quickly taken for granted. It ceases to be a matter for 
discussion or even of thought. Henceforth, in pursuing the goal of greater 
economic security, we will be completing and perfecting a structure that in 
all its major features now exists. 

One cannot stress too strongly, however, that if economic security is to 


be considered finished business, or largely finished business, depression 
and inflation must be prevented. A depression could always break down 
the micromeasures that have so laboriously been erected by (or for) 
businessmen, workers, farmers and other citizens for their protection. 
Business arrangements for modifying and controlling competition in the 
interests of market stability then turn into cutthroat competition. 
Unemployment insurance becomes not a transitional protection for the 
worker who is changing jobs but an inadequate livelihood. Farm price 
supports become low maximum rather than high minimum prices. By the 
same token, inflation reduces the purchasing power of savings, undermines 
other steps by which people have insured their future income or had it 
insured. Prevention of depression and inflation remains a sine qua non for 
economic security. 


The desire for economic security was long considered the great enemy of 
increased production. This attitude was firmly grounded in the belief that 
the insecurity of the competitive model was essential for efficiency. Along 
with the carrot of pecuniary reward must go the stick of personal economic 
disaster. Both were essential. To remove the stick, which must be the 
consequence of increasing economic security, would be to remove half the 
incentives by which men were inspired. 

Plainly, however, the notion that economic insecurity is essential for 
efficiency and economic advance was a major miscalculation—one of the 
greatest in the history of economic ideas. It was the common 
miscalculation of both Marxian and orthodox economists. Marx and his 
followers were deeply persuaded that capitalism would be crippled by 
efforts to civilize it. Unemployment compensation, for example, would 
ruin the operation of the industrial reserve army in regulating wages. In 
fact, the years of increasing concern for economic security have been ones 
of unparalleled advance in productivity. Those spokesmen who have been 
most alarmed over the debilitating effects of the search for security have 
often remarked most breathlessly on the improvements in productivity 
which have occurred at the same time. 

The data on what has happened to output in the age of security could 
scarcely be more impressive. In the twenty years prior to the nineteen- 


thirties, the decades when the problem of security first became a source of 
conventional concern, labor productivity—national income produced per 
man-hour—increased from 89.6 cents in 1900 to 113.3 cents in 1929. This 
was a total of 23.7 cents or at a rate of about 1.2 cents a year. In the ten 
years following the thirties, the total increase was from 131.5 cents to 
179.2 cents or by 47.7 cents. This was by an average of 4.8 cents a year or 
four times the amount of the earlier period. The increases continued in 
subsequent decades. Plainly the increased concern for security, so far from 
being in conflict with increased productivity, was consistent with a greatly 
accelerated rate of advance. - The most impressive increases in output in 
the history of both the United States and other western countries have 
occurred since men began to concern themselves with reducing the risks of 
the competitive system. 

However, in the conventional wisdom such empirical evidence is not 
necessarily decisive. The consequences truly depicted by the conventional 
wisdom are, it is held, lurking just out of sight. To respect the evidence is 
only to evince an unsubtle mind. Yet in this instance the reality is 
somewhat difficult to evade. The increase in economic security and the 
increase in economic product are accomplished facts. The conflict between 
security and progress, once billed as the social conflict of the century, 
doesn't exist. 


Not only is there no inconsistency between the mitigation of insecurity and 
the increase of production, but the two are indissolubly linked. A high 
level of economic security is essential for maximum production. And a 
high level of production is indispensable for economic security. We must 
carry a step further our examination of this reciprocal relation between 
production and economic security. 

The major threat to production in our day is not, as the more nostalgic 
exponents of the conventional wisdom still so fondly imagine, the lazy and 
malingering workman or the unenterprising boss. These wastrels 
unquestionably exist. Payments designed to bridge periods of involuntary 
unemployment do provide modestly for some wholly voluntary idleness in 
Florida. There are feather-bedding unions and goldbricking workmen and 
slothful supernumeraries everywhere. Indeed, it is possible that the ancient 


art of evading work has been carried in our time to its highest level of 
sophistication, not to say elegance. One should not suppose that it is an 
accomplishment of any particular class, occupation or profession. Apart 
from the universities where its practice has the standing of a scholarly rite, 
the art of genteel and elaborately concealed idleness may well reach its 
highest development in the upper executive reaches of the modern 

The loss of production from this conventional and cherished shirking is 
small as compared with what can be lost from the involuntary idleness of 
workers and the far more ruthless frustration of entrepreneurial initiative as 
the result of depression. For the same reason, the potential gain in 
production from eliminating such involuntary idleness, and from widening 
entrepreneurial opportunity by expanding markets, is far greater than 
anything that could be hoped for from the most sweeping strengthening of 
individual incentives resulting in the most radical increase in the 
willingness of individuals to work or expend executive energy. 

Between 1929 and 1932, the Gross Domestic Product, roughly the total 
production of the nation, expressed in constant (1958) dollars, dropped by 
$54 billion from $197.1 billion to $143.0 billion.- No diminution in the 
energy or initiative of workmen or their employers could have an effect 
comparable with this massive increase in forced idleness by individuals 
who would have much preferred to work. (Between 1929 and 1932, 
unemployment increased from 1.55 million to 12.1 million; 
nonagricultural employment decreased from 35.1 million to 28.8 million.)- 
This was a demonstration of historic magnitude of the inefficiency of 
depression. But there have been more modest if still striking 
demonstrations. In late 1953 and 1954, there was a mild depression and in 
the latter year, output was slightly below the previous year. ($360.5 billion 
as compared with $364.5 billion. Prices were the same.) Unemployment 
increased from 1.6 million in 1953 to 3.2 million in 1954. If instead of this 
slight decline there had been the commonplace increase of immediately 
preceding years, which the labor force could have sustained, production 
would have been about $20 billion greater. That was equal to nearly a third 
of the outlays of the federal government at the time and approached the 
total of all state and local outlays. This production was not missed and, 
indeed, its loss was little remarked. In the recession years of the mid¬ 
seventies, this experience was repeated with a similar absence of grief. We 
shall see later that there were very good reasons for such equanimity—the 


goods so sacrificed were not, in fact, of high urgency. But the figures do 
show the inefficiency of even the mildest depression. 

The immediate although not the ultimate cause of depression is a fall in 
the aggregate demand—meaning in the purchasing power available and 
being used—for buying the output of the economy. Unemployment 
insurance means that a man's purchasing power is partially protected when 
he loses his job. It falls, but no longer to zero. Thus a measure designed to 
reduce the insecurity associated with unemployment also acts to counteract 
the loss of output—the economic inefficiency—of depression. And, to the 
confusion of the conventional wisdom, it acts on a central cause of 
inefficiency, one that is far more important than isolated malingering 
which unemployment insurance might conceivably have encouraged. 

This effect, of course, is not peculiar to unemployment insurance. 
Farm support prices, which force compensatory public outlays when farm 
prices, income and purchasing power fall, have the same effect. So do 
public welfare payments. Old age and survivor's insurance ensure a modest 
but steady flow of purchasing power from those who are no longer able to 
work. This flow is unaffected by an ebb in economic activity and thus acts 
as a stabilizing influence. In the aggregate, these measures to m ini mize 
insecurity comprise a considerable part of what economists call the "built- 
in stabilizers" of the economy. Thus measures thought by the conventional 
wisdom to be hostile to productivity all support it at the most crucial point. 

But the reciprocal effect is equally clear and the pressures back of it 
are much more demanding. As noted above, a high level of production is 
essential for the economic security of workers, farmers and businessmen. 
With it, there is a tolerable level of security for all. Without a high level of 
output, the microeconomic measures, in their present form at least, are 
only a second best. Moreover, although it has been a point in favor of 
unemployment compensation, old age pensions and other measures for 
microeconomic security that they enhance economic stability, this has 
never been their central purpose. They have been centrally designed with 
the individual recipient in mind. 

By contrast, to a very large degree in recent times, increased output has 
been sought not for the goods involved but for the effect on economic 
security. Whether we need or even wish the goods that are produced, their 
assured production means assured income for those who produce them. 
This serves the goal of economic security. Nothing else serves it so well. 


To falter on production, even though that production serves the most 
unimportant of requirements, is to expose some individuals somewhere to 
loss of employment and income. This cannot be allowed. 

The facts here are a matter of common observation. In the political life 
of western countries—the United States, the United Kingdom, the older 
British Commonwealths, Western Europe—nothing counts so heavily 
against a government as allowing unnecessary unemployment. It is not the 
lost production that is mentioned. It is always the unemployment. The 
remedy is, of course, more employment and higher production. Thus the 
effort to enhance economic security becomes the driving force behind 

The reader scarcely needs to be reminded of the point at which this 
essay has arrived. The ancient preoccupations of economic life—with 
equality, security and productivity—have now narrowed down to a 
preoccupation with productivity and production. Pro-duction has become 
the solvent of the tensions once associated with inequality, and it has 
become the indispensable remedy for the discomforts, anxieties and 
privations associated with economic insecurity. Here we have the 
explanation, or more precisely the beginning of the explanation, of a 
modern paradox: Why is it that as production has increased in modem 
times concern for production seems also to have increased? Production has 
become the center of a concern that had hitherto been shared with equality 
and security. For these reasons, and supported, we shall see, by an 
elaborately synthetic reinforcement, it has managed at least superficially to 
retain the prestige which inevitably it had in the poor world of Ricardo. 
The nature of the present preoccupation with production, and the devices 
by which this preoccupation is sustained, are the next order of business. 


9. The Paramount Position of Production 

some years ago, American statesmen, defending their stewardship under 
heavy opposition attack, were moved to protest that the current year was 
the second best in history. It was not, in all respects, a happy defense. 
Many promptly said that second best was not good enough—certainly not 
for Americans. But no person in either political party showed the slightest 
disposition to challenge the standard by which it was decided that one year 
was better than another. Nor was it felt that any explanation was required. 
No one would be so eccentric as to suppose that second best meant second 
best in the progress of the arts and the sciences. No one would assume that 
it referred to health, education or the battle against juvenile delinquency or 
even violent crime. There was no suggestion that a better or poorer year 
was one in which the chances for survival amidst the radioactive furniture 
of the world had increased or diminished. Despite a marked and somewhat 
ostensible preoccupation with religious observances at the time, no one 
was moved to suppose that the year in question was the second best as 
measured by the number of people who had found enduring spiritual 

Second best could mean only one thing—that the production of goods 
was the second highest in history. There had been a year in which 
production was higher and which hence was better. This measure of 
achievement was acceptable to all. It is a relief on occasion to find a 
conclusion that is above faction, indeed above debate. On the importance 
of production as a test of performance, there is no difference between 
Republicans and Democrats, right and left, white and minimally 
prosperous black, Catholic and Protestant. It is common ground for the 
Chairman of Americans for Democratic Action, the President of the 
United States Chamber of Commerce and the President of the National 
Association of Manufacturers. 

We are, to be sure, regularly told that production is not everything. We 
set no small store by reminders that there is a spiritual side to life; those 
who remind are assured a respectful though not necessarily attentive 
hearing. But it is significant that these are always reminders; they bring to 
mind what is usually forgotten. No one doubts that in the general course of 
life one must be sensible and practical. Indeed, it is an index of the prestige 
of production in our national attitudes that it is identified with the sensible 


and practical. No greater compliment can be paid to the forthright 
intelligence of any businessman than to say that he understands 
production. Scientists are not without prestige in our day, but to be really 
useful, we still assume that they should be under the direction of a 
production man. "Any device or regulation which interferes, or can be 
conceived as interfering, with [the] supply of more and better things is 
resisted with unreasoning horror, as the religious resist blasphemy, or the 
warlike pacifism. 

The importance of production transcends our boundaries. We are 
regularly told—in the conventional wisdom it is the most frequent 
justification of our civilization, even our existence—that the American 
standard of living is "the marvel of the world." To a very considerable 
extent, it is. 


As Tawney observed, we are rarely conscious of the quality of the air we 
breathe. But in Los Angeles, where it is barely sufficient for its freight, we 
take it seriously. Similarly, those who reside on a re-claimed desert see in 
the water in the canals evidence of the unnatural triumph over nature. And 
the Chicagoan in Sarasota sees in his tanned belly the proof of his 
intelligence in escaping his dark and frozen habitat. But where sun and 
rain are abundant, though they are no less important, they are taken for 
granted. In the world of Ricardo, goods were scarce. They were also 
closely related, if not to the survival, at least to the elemental comforts of 
man. They fed him, covered him when he was out of doors and kept him 
warm when he was within. It is not surprising that the production by which 
these goods were obtained was central to men's thoughts. 

Now goods are comparatively abundant. Although there is much 
malnutrition in the world, more die in the United States of too much food 
than of too little. No one seriously suggests that all the steel going into our 
automobiles is of prime urgency. Their size, in fact, is now deplored. For 
many women and some men, clothing has ceased to be related to 
protection from exposure and has become, like plumage, almost 
exclusively erotic. Yet production remains central to our thoughts. There is 
no tendency to take it, like sun and water, for granted; on the contrary, it 
continues to measure the quality and progress of our civilization. 


Our preoccupation with production is, in fact, the culminating 
consequence of powerful historical and psychological forces—forces 
which only by an act of will we can hope to escape. Productivity, as we 
have seen, has enabled us to avoid or finesse the tensions anciently 
associated with inequality and its inconvenient remedies. It has become 
central to our strivings to reduce insecurity. And as we shall observe in the 
next chapters, its importance is buttressed by a highly dubious but widely 
accepted and strenuously defended theory of consumer wants and by 
powerful vested interest. So all-embracing, indeed, is our sense of the 
importance of production as a goal that the first reaction to any questioning 
of this attitude will be, "What else is there?" So large does production bulk 
in our thoughts that we can only suppose that a vacuum must remain if it 
should be relegated to a smaller role. Happily, as we shall see in the 
concluding chapters, there are other things. But first we must examine 
more closely our present preoccupation with production. For nothing better 
suggests the extent to which it is founded on tradition and social myth than 
the highly stylized attitudes with which we approach it and, in particular, 
the traditional and highly irrational emphasis we accord to the different 
methods of expanding economic product. 


Production—the output of the economic system—can, in principle, be 
increased in five different ways. These are worth listing formally and are 
as follows: 

(1) The productive resources that are available, in 
particular the labor and capital (including available raw 
materials), can be more fully employed. In other words, 
idleness can be eliminated. 

(2) Given the technical state of the arts, these resources 
can be more efficiently utilized. Labor and capital can 
be used in the most advantageous combination, one 
with the other, and the two can be distributed to the 
greatest advantage, consumer tastes considered, 
between the production of various things and the 
rendering of various services. 

(3) The supply of labor can be increased. 


(4) The supply of capital, which also serves as a 
substitute for labor, can be increased. 

(5) The state of the arts can be improved by 
technological innovation. As a result, more output can 
be obtained from a given supply of labor and capital 
and the capital will be of better quality. 

On purely a priori grounds, there is no reason for supposing that any one 
of these methods of increasing production is more effective than any 
others A serious effort to increase output would emphasize all five. Yet it 
is the truly remarkable fact that we concern ourselves formally in 
economics with only one of these methods of increasing output and give, 
at the very most, only passing attention to another two or three. 

Thus, even in the conventional wisdom, no one questions the 
importance of technological advance for increasing the production (and 
also multiplying the products) from the available resources. These gains 
are regularly viewed with great and even extravagant pride. Improvements 
in technology do not come by accident. They are the result of investment 
in highly organized scientific and engineering knowledge and skills. Yet 
we do very little of a systematic sort to increase the volume of this 
investment, except where some objective of military urgency provides the 
excuse. Rather, we accept whatever investment in technology is currently 
being made and applaud the outcome. 

The investment almost certainly could be much greater and far more 
rational. Even on the most superficial view, the scientific and engineering 
resources by which modem technology is advanced are most unevenly 
distributed between industries. In industries where firms are few and 
comparatively large—oil, metallurgy, automobiles, chemicals, mbber, 
heavy engineering—the investment in technological advance is 
considerable. The research and developmental work on which this advance 
depends is well financed and comprehensive. But in many industries 
where the firms are numerous and small—home constmction, clothing 
manufacture, the natural-fiber textile industry, the service industries—the 
investment in innovation is negligible. No firm is large enough to afford it 
on an appreciable scale; there is real question as to whether it is 
worthwhile for such firms.- Unlike agriculture, where innovation is 
extensively supported by the federal and state governments, there is little 


or no publicly financed research and development. Yet the absence of 
investment in innovation in these industries, much though we value its 
fruits in other industries in which it occurs, excites not the slightest 
attention. We attach profound importance to the fact that some industries 
advance. We attach almost no importance to the fact that others do not. 

It is easy to overlook the absence of appreciable advance in an 
industry. Inventions that are not made, like babies that are not bom, are 
rarely missed. In the absence of new developments, old ones may seem 
very impressive for quite a long while. Until the combine appeared, the 
self-binder had been the mechanical marvel of the farm machinery 
industry for forty years. But if we were serious about increased output, we 
would be much more searching in these matters. Certainly we would 
regard the absence of investment in innovation in an industry as 
intolerable. But, in fact, large numbers of industries make little or no such 
investment, have little or none made on their behalf, and we are quite 


In everyday economic discourse, nothing is more frequently taken as an 
index of economic growth than the volume of capital formation. This is the 
product of saving from current consumption and companion investment. 
As with technological advance, we content ourselves with whatever 
volume of capital formation we are getting. An occasional scholar may 
observe that we are not investing enough—possibly that the proportion of 
current income invested by some other country is greater. We have routine 
preachments on the virtues of thrift. But none of this is assumed to call for 
any practical action. On the contrary, there is a more general conviction 
that the current volume of investment in the American economy is never 
less than adequate and is rarely less than remarkable. 

As with capital so with the labor force. Once princes and feudal lords 
who wished to increase the productive wealth of their domains imported 
craftsmen as a matter of course. So far as there is a single current 
limitation on the rate of growth in the American economy, it is the size and 
skill composition of the labor force. (Substitution of capital for labor is 
ordinarily possible with slight effect on cost over a considerable range of 
output, but some time is required.) The world contains a great many 


potential recruits for our labor force. But nothing is viewed with more 
suspicion than this method of expanding output. Even to suggest that 
efforts be made to expand the labor force by increasing the domestic birth 
rate would seem slightly artful. The resistance arises partly from the belief, 
not wholly justified, that an increase in population might increase total but 
not per capita production. No nice philosophical point has ever been so 
decisively resolved as this: that those who are not conceived do not miss 
the pleasure of consuming the goods they do not get born to enjoy. But 
whatever the effect of increasing population on standards of living, it is 
clear that we are not sufficiently interested in increased output, or 
sufficiently rational about the means of getting it, to seek it by increasing 
the labor supply. 

Even the production that is lost during a depression—and, as noted in 
the last chapter, the loss from even a mild setback can be considerable— 
though it is the subject of a certain amount of erudite regret by economists 
is not a matter of any general concern. The menace of depressions is not 
the production that is sacrificed but the jobs and income that are lost—in 
short, the threat to economic security. 

On the other hand, we do take very seriously loss of production which 
is the result of the deliberate holding of labor or capital out of production 
or which is the result of any inefficiency in their combination and use. We 
deplore the malingering workman. We become deeply aroused by the 
featherbedding union. A monopoly leads, in theory, to a less than optimum 
employment of labor and capital in a particular industry and therefore a 
higher than necessary price for the product. The resources not employed in 
the monopolized industry are employed in larger quantity and to less 
advantage in other industries, which means that their distribution is less 
than ideal. Some enthusiasm can still be aroused for measures that increase 
output by eliminating monopoly. Economists long gave their leadership to 
the effort. - There is equal antipathy to and similar popular concern about 
inefficient use of resources resulting from tariffs and excessive investment 
in inherently costly industries; about subsidies to favored but inefficient 
industries or firms; and about the forms of industrial organization which 
lead to heavy advertising or sales costs or similar seeming waste. 
Although, curiously, there is no special concern about the industry that 
does no research and makes little technological progress from one year to 
the next, nothing would inspire indignation like a firm which, having made 
an invention, held it out of use. 


None of this is here to decry concern for monopoly, tariffs, subsidies or 
organized and unrepentant idleness. Also, although productive efficiency 
is the central, it is not the sole issue where these matters are concerned. 
Rather, my purpose is to show how partial and indeed eccentric is our 
concern for increased production. Nor are its roots very difficult to 
uncover. A hundred and fifty years ago in mid-nineteenth-century Britain, 
an economist surveying the possibilities for increasing the production on 
his islands would have found one important and two or three much less 
important things to recommend. Most obviously and most importantly, he 
could urge that by attacking monopolies, lowering tariffs and promoting 
competition and the free and unhampered movement of labor and capital, 
the efficiency with which labor and capital were employed would be 
increased. Much less importantly, he could urge that people be thrifty and 
save so that the rate of capital formation might be increased. He could 
always urge workers to be diligent. He could condemn anything that might 
involve restrictions on their effort or impairment of their incentives. 

Few of the modem possibilities for raising production were relevant. In 
a world that was still under the shadow of Malthus, he could hardly 
propose adding more people. There were presumed to be as many as the 
food supply could sustain. This was well before the age of the large 
industrial corporation. Only with the arrival of the latter were investment 
decisions removed from the hands of numerous independent entrepreneurs, 
responding individually to market incentives, and made subject to a 
measure of corporate administration. And until this happened, it was not 
really possible to think of the rate of investment and the consequent rate of 
growth as anything that might be within range of social interest and 

The nineteenth-century scholar could scarcely have been occupied with 
the volume of research and development in an industry. This is a modern 
phenomenon and also related to the growth of modem corporate 
enterprise. In his day, invention was a largely adventitious matter save as it 
might be encouraged by the patent office. (The patent office, 
appropriately, was taken very seriously.) The loss of production during 
depressions was not an issue in a world which lacked good unemployment 
and output statistics and in which depressions, in any case, were regarded 
as inevitable. 

The lesson will be evident. Our operative concern for increasing 


production is confined to the measures—for getting greater resource-use 
efficiency and promoting thrift and diligence—which were relevant a 
century and more ago. The newer dimensions along which there might be 
progress attract our specific and operative attention much less. The 
shortcomings and opportunities here are undoubtedly great. But they are 
outside the formal and stylized concern of the conventional wisdom for the 
problem of production. 

There is an interesting proof of the point in the increase in production 
which, in the past, we have regularly achieved during war or under the 
threat of war. Under the stress of circumstance, the conventional wisdom 
is rejected. We set about expanding output along all the relevant 
dimensions. Serious efforts are made to expand the labor force. It becomes 
permissible to import toilers with swarthy skins who speak unintelligible 
languages. The drive for increased saving becomes serious. Where 
investment is inadequate, more is made. There is no involuntary idleness. 
As in the case of alloy steels, synthetic rubber manufacture, and ship 
construction in World War II, technology is brought purposefully to play 
to permit of expanded output with available resources. It is at least 
amusing (though not too much store should be set by the point) that during 
both World Wars the enforcement of the antitrust laws, the traditional 
design for ensuring greater resource-use efficiency, was suspended. 
Because of a rational concern for production, war has brought an 
astonishing expansion in output, and this despite the withdrawals from the 
labor force for military purpose. 

Though we have been astonished, we should not have been. Our 
peacetime concern for production, central though it is to our thoughts, is 
selective and traditional. As a result, at any given time both our total 
output and its rate of increase are only a small part of what they might be, 
perhaps indeed only a minor fraction. Nor would the necessary measures 
to expand the labor force, expand the rate of capital formation, and, 
perhaps most important, to bring technology to bear on presently backward 
industries require any very revolutionary change in our economic and 
political system. It would only require that production have the priority in 
all public policy which it now has in the traditional areas of resource use 
and combination. 



There is another respect in which our concern for production is traditional 
and irrational. We are curiously unreasonable in the distinctions we make 
between different kinds of goods and services. We view the production of 
some of the most frivolous goods with pride. We regard the production of 
some of the most significant and civilizing services with regret. 

Economists in calculating the total output of the economy—in arriving 
at the now familiar Gross Domestic Product—add together the value of all 
goods and all services of whatever sort and by whomsoever produced. No 
distinction is made between public and privately produced services. An 
increased supply of educational services has a standing in the total not 
different in kind from an increased output of television receivers. Nothing, 
however, could be more in conflict with traditional attitudes, and indeed it 
is rather surprising that economists have not been reproached by the rather 
considerable number of individuals who, if they fully understood the 
nature of the calculation, would regard the inclusion of government 
spending as subversive. 

In the general view, it is privately produced production that is 
important, and that nearly alone. This adds to national well-being. Its 
increase measures the increase in national wealth. Public services, by 
comparison, are an incubus. They are necessary, and they may be 
necessary in considerable volume. But they are a burden which must, in 
effect, be carried by the private production. If that burden is too great, 
private production will stagger and fall. 

At best, public services are a necessary evil; at worst, they are a malign 
tendency against which an alert community must exercise eternal 
vigilance. Even when they serve the most important ends, such services 
are sterile. "Government is [held to be] powerless to create anything in the 
sense in which business produces wealth ..."- 

Such attitudes lead to some interesting contradictions. We welcome 
expansion of telephone services as improving the general well-being but, 
on occasion, accept curtailment of postal services as signifying necessary 
economy. We set great store by the increase in private wealth but regret 
the added outlays for the police force by which it is protected. Vacuum 
cleaners to ensure clean houses are praiseworthy and essential in our 
standard of living. Street cleaners to ensure clean streets are an unfortunate 
expense. Partly as a result, our houses are generally clean and our streets 


generally filthy. In the more sophisticated of the conventional wisdom, this 
distinction between public and private services is much less sharp and, as I 
have observed, it does not figure in the calculation of Gross Domestic 
Product. However, it never quite disappears. Even among economists and 
political philosophers, public services rarely lose their connotation of 
burden. Although they may be defended, their volume is almost certainly 
never a source of pride. 


There are a number of reasons for these attitudes, but again tradition plays 
a dominant role. In the world into which economics was bom, the four 
most urgent requirements of man were food, clothing and shelter, and an 
orderly environment in which the first three might be provided. The first 
three lent themselves to private production for the market; given good 
order, this production has ordinarily gone forward with tolerable 
efficiency. But order which was the gift of government was nearly always 
supplied with notable unreliability. With rare exceptions, it was also 
inordinately expensive. And the pretext of providing order not infrequently 
afforded the occasion for rapacious appropriation of the means of 
sustenance of the people. 

Not surprisingly, modem economic ideas incorporated a strong 
suspicion of government. The goal of nineteenth-century economic 
liberalism was a state which did provide order reliably and inexpensively 
and which did as little as possible else. Even Marx intended that the state 
should wither away. These attitudes have persisted in the conventional 
wisdom. And again events have dealt them a series of merciless blows. 
Once a society has provided itself with food, clothing and shelter, all of 
which so fortuitously lend themselves to private production, purchase and 
sale, its members begin to desire other things. And a remarkable number of 
these things do not lend themselves to such production, purchase and sale. 
They must be provided for everyone if they are to be provided for anyone, 
and they must be paid for collectively or they cannot be had at all. Such is 
the case with clean streets and police and the general advantages of mass 
literacy and sanitation, the control of epidemics, and the common defense. 
There is a strong possibility that the services which must be rendered 
collectively, although they enter the general scheme of wants after the 
immediate physical necessities, increase in urgency more than 


proportionately with increasing wealth. This is more likely if increasing 
wealth is matched by increasing population and increasing density of 
population. Nonetheless, these services, although they reflect increasingly 
urgent desires, remain under the obloquy of the unreliability, 
incompetence, cost and pretentious interference of princes. Alcohol, comic 
books and mouthwash all bask under the superior reputation of the market. 
Schools, judges, patrolmen and municipal swimming pools lie under the 
evil reputation of bad kings. 

Moreover, bad kings in a poorer world showed themselves to be quite 
capable, in their rapacity, of destroying or damaging the production of 
private goods by destroying the people and the capital that produced them. 
Economies are no longer so vulnerable. Governments are not so 
undiscriminating. In western countries, in modern times, economic growth 
and expanding public activity have, with rare exceptions, gone together. 
Each has served the other, as indeed they must. Yet the conventional 
wisdom is far from surrendering on the point. Any growth in public 
services is a manifestation of an intrinsically evil trend. If the vigor of the 
race is not in danger, personal liberty is. The structure of the economy may 
also be at stake. In one branch of the conventional wisdom, the American 
economy is never far removed from socialism, and the movement toward 
socialism may be measured by the rise in public spending. Thus even the 
most commonplace of public services, for one part of the population, fall 
under the considerable handicap of being identified with social revolution. 

Finally—also a closely related point—the payment for publicly 
produced services has long been linked to the problem of inequality. By 
having the rich pay more, the services were provided and at the same time 
the goal of greater equality was advanced. This community of objectives 
has never appealed to those being equalized. Not unnaturally, some part of 
their opposition has been directed to the public services themselves. By 
attacking these, they could attack the leveling tendencies of taxation. This 
has helped to keep alive the notion that the public services for which they 
pay are inherently inferior to privately produced goods. 

While public services have been subject to these negative attitudes, 
private goods have had no such attention. On the contrary, their virtues 
have been extolled by the massed drums of modem advertising. They have 
been pictured as the ultimate wealth of the community. Clearly the 
competition between public and private services, apart from any question 


of the satisfactions they render, is an unequal one. The social 
consequences of this discrimination—this tendency to accord a superior 
prestige to private goods and an inferior role to public production—are 
considerable and even grave. 


By way of summary, then, while production has come to have a goal of 
pre-eminent importance in our life, it is not a goal which we pursue either 
comprehensively or even very thoughtfully. We take production as the 
measure of our achievement, but we do not strive very deliberately to 
achieve. Our efforts to increase production are stylized. We stress the evils 
of idleness and bad resource allocation which were relevant to efforts to 
increase output a century ago. We do little or nothing in peacetime to 
increase the rate of capital formation or the rate of technological progress 
in background industries despite the clear indication that these are the 
dimensions along which large increases in output are to be expected. We 
do not deplore the production we lose in depression. We are protected 
from this loss far more by the threat of depression to economic security. 
Last of all, on ancient and traditional grounds, we relegate one important 
class of production, that of public goods, to a second-class citizenship. 

The predictable reaction of many readers will be that we should by all 
means address ourselves to the measures for increasing output that we now 
ignore. However, a closer look is called for. We need to understand the 
reasons for our passivity in this matter. In the past, under conditions of 
emergency, we have addressed ourselves seriously to the measures by 
which output is seriously increased. Perhaps we fail to do so in present 
circumstances less because of ignorance or inertia than because the 
additional production is not of sufficient urgency to justify the effort. Our 
preoccupation with production, in other words, may be a preoccupation 
with a problem of rather low urgency. We are not sufficiently concerned 
about it to have recourse to the measures by which production could be 
efficiently increased. We are content with what we get, which comes close 
to saying that we are deeply concerned with production only so far as the 
problem solves itself. We set great store by doing what, in a manner of 
speaking, comes naturally. 

None of this would be possible if the goods we produced were of great 


and urgent importance. Then we would be searching vigorously for ways 
of increasing the supply instead, as at present, of regarding with approval 
the increases we obtain. All this becomes intelligible, and in degree even 
obvious, when we contemplate the elaborate myth with which we surround 
the demand for goods. This has enabled us to become persuaded of the dire 
importance of the goods we have without our being in the slightest degree 
concerned about those we do not have. For we have wants at the margin 
only so far as they are synthesized. We do not manufacture wants for 
goods we do not produce. 


io. The Imperatives of Consumer Demand 

In an economy, such as that of the United States of 
America, where leisure is barely moral, the problem of 
creating sufficient wants ... to absorb productive 
capacity may become chronic in the not too distant 
future. In such a situation the economist begins to lead a 
furtive existence. 


both the ancient preoccupation with production and the pervasive 
modern search for security have culminated in our time in a concern for 
production. Increased real income provides us with an admirable detour 
around the rancor anciently associated with efforts to redistribute wealth. 
A high level of production has become the keystone of effective economic 
security. There remains, however, the task of justifying the resulting flow 
of goods. Production cannot be an incidental to the mitigation of inequality 
or the provision of jobs. It must have a raison d'etre of its own. At this 
point, economists and economic theory have entered the game. So, more 
marginally, has the competitive prestige that goes with expanding 
domestic product. The result has been an elaborate and ingenious defense 
of the importance of production as such. It is a defense which makes the 
urgency of production largely independent of the volume of production. In 
this way, economic theory has managed to transfer the sense of urgency in 
meeting consumer need that once was felt in a world where more 
production meant more food for the hungry, more clothing for the cold and 
more houses for the homeless to a world where increased output satisfies 
the craving for more elegant automobiles, more exotic food, more erotic 
clothing, more elaborate entertainment—indeed, for the entire modern 
range of sensuous, edifying and lethal desires. 

Although the economic theory which defends these desires and hence 
the production that supplies them has an impeccable (and to an astonishing 
degree even unchallenged) position in the conventional wisdom, it is 
illogical and meretricious and, in degree, even dangerous. 



The rationalization begins with the peculiar urgency of production not to 
society but to economic science. There will be occasion later for 
considering the vested interest in production, but it may be noted here that 
the interest of the economist is unique. The importance of production is 
central to his scheme of economic calculation. All existing pedagogy and 
nearly all research depend on it. Any action which increases production 
from given resources is good and implicitly important; anything which 
inhibits or reduces output is, pro tanto, wrong. In the choice between two 
taxes, there is a nearly overriding case for the one that least damages 
efficiency, meaning the output from a given stock of labor and capital. If a 
company seems to be restricting production to enhance returns, or for any 
other reason, it can safely be condemned as antisocial. This is at least 
equally so with a trade union. The test of effect on productive efficiency is 
all but universal. 

To assess the effect of a given action or measure, say a new union rule, 
on production is not always easy. There may be a complicated chain of 
cause and effect on which opinions will differ. The effect on the short run 
may be different from that on the long. And where it is necessary to assess 
the effect on a variety of products, or on the total output of the economy, 
there are numerous difficulties. The latter must be valued, and the prices at 
which individual items are valued will reflect the existing income 
distribution (the prices of mink pelts reflect the demand of an opulent 
minority), or, in some cases, the more or less arbitrary decision of the 
firms that administer the prices. Hence, to trace and compare the effect of 
different policies on the output of the economy can be endlessly intricate. 
But all this provides much of the interest of economics as well as a good 
deal of its employment. And underlying all is the bedrock agreement on 
the goal and on the importance of that goal. Anything that increases the 
product from given resources increases welfare. It is important that it be 
done. Here is the anchor. To cast doubt on the importance of production is 
thus to bring into question the foundation of the entire edifice. Action must 
then be tested by new criteria—criteria which are necessarily difficult and 
subjective. Nothing could be less welcome. At least in social disciplines, 
obsolescence and irrelevance are a small price to pay for the privilege of 
remaining comfortably, even if archaically, with the familiar, the settled 
and the safe. 

And the profession of economics is not lacking in the instinct of self- 
preservation. The mother bear sees in the threat to her cubs the ultimate 


threat to the survival of her kind. She reacts with angry hostility. Nothing 
is more likely to produce a similar reaction from defenders of the 
conventional economic wisdom than an attack on the edifice which now 
rationalizes the importance of production and the urgency of consumer 

The parallel with maternal instinct is important, for the defense of the 
present value system as it relates to production is largely intuitive. Few 
economists in recent years can have escaped some uneasiness over the 
kinds of goods which their value system is insisting they must maximize. 
They have wondered about the urgency of numerous products of great 
frivolity. They have been uneasy about the lengths to which it has been 
necessary to go with advertising and salesmanship to synthesize the desire 
for such goods. That uneasiness has reflected the crucial weakness of the 
literature on this point. 

The weakness, as well as the ultimate defense, lies with the theory of 
consumer demand. This is a formidable structure; it has already 
demonstrated its effectiveness in defending the urgency of production. In a 
world where affluence is rendering the old ideas obsolete, it will continue 
to be the bastion against the misery of new ones. 


The theory of consumer demand, as is now widely accepted, is based on 
two broad propositions, neither of them quite explicit but both extremely 
important for the present value system of economists. The first is that the 
urgency of wants does not diminish appreciably as more of them are 
satisfied or, to put the matter more precisely, to the extent that this 
happens, it is not demonstrable and not a matter of any interest to 
economists or for economic policy. When man has satisfied his physical 
needs, then psychologically grounded desires take over. These can never 
be satisfied or, in any case, no progress can be proved. The concept of 
satiation has very little standing in economics. It is held to be neither 
useful nor scientific to speculate on the comparative cravings of the 
stomach and the mind. 

The second proposition is that wants originate in the personality of the 
consumer or, in any case, that they are given data for the economist. The 
latter's task is merely to seek their satisfaction. He has no need to inquire 


how these wants are formed. His function is sufficiently fulfilled by 
maximizing the goods that supply the wants. 

The examination of these two conclusions must now be pressed. The 
explanation of consumer behavior has its ancestry in a much older 
problem, indeed the oldest problem of economics, that of price 
determination.^ Nothing originally proved more troublesome in the 
explanation of prices, i.e., exchange values, than the indigestible fact that 
some of the most useful things had the least value in exchange and some of 
the least useful had the most. As Adam Smith observed: "Nothing is more 
useful than water; but it will purchase scarce anything; scarce anything can 
be had in exchange for it. A diamond, on the contrary, has scarce any 
value in use: but a very great quantity of other goods may frequently be 
had in exchange for it." - 

In explaining value, Smith thought it well to distinguish between 
"value in exchange" and "value in use" and sought thus to reconcile the 
paradox of high utility and low exchangeability. This distinction begged 
questions rather than solved them and for another hundred years, 
economists sought for a satisfactory formulation. Finally, toward the end 
of the last century—though it is now recognized that their work had been 
extensively anticipated—the three economists of marginal utility (Karl 
Menger, an Austrian; William Stanley Jevons, an Englishman; and John 
Bates Clark, an American) produced more or less simultaneously the 
explanation which, in broad substance, still serves. The urgency of desire 
is a function of the quantity of goods which the individual has available to 
satisfy that desire. The larger the stock, the less the satisfactions from an 
increment. And the less, also, the willingness to pay. Since diamonds for 
most people are in comparatively meager supply, the satisfaction from an 
additional one is great, and the potential willingness to pay is likewise 
high. The case of water is just the reverse. It also follows that where the 
supply of a good can be readily increased at low cost, its value in exchange 
will reflect that ease of reproduction and the low urgency of the marginal 
desires it thus comes to satisfy. This will be so no matter how difficult it 
may be (as with water) to dispense entirely with the item in question. 

The doctrine of diminishing marginal utility, as it was enshrined in the 
economics textbooks, seemed to put economic ideas squarely on the side 
of the diminishing importance of production under conditions of 
increasing affluence. With increasing per capita real income, men are able 


to satisfy additional wants. These are of a lower order of urgency. This 
being so, the production that provides the goods that satisfy these less 
urgent wants must also be of smaller (and declining) importance. In 
Ricardo's England, the supply of bread for many was meager. The 
satisfaction resulting from an increment in the bread supply—from a 
higher money income, bread prices being the same, or the same money 
income, bread prices being lower—was great. Hunger was lessened; life 
itself might be extended. Certainly any measure to increase the bread 
supply merited the deep and serious interest of the public-spirited citizen. 

In the contemporary United States, the supply of bread remains 
plentiful. The yield of satisfactions from a marginal increment in the 
supply is small. Measures to increase the supply of bread or wheat have 
not, therefore, been a socially urgent preoccupation of publicly concerned 
citizens.- Having extended their bread consumption to the point where its 
marginal utility is very low, people in the industrial countries have gone on 
to spend their income on other things. Since these other goods entered 
their consumption pattern after bread, there is a presumption that they are 
not very urgent either—that their consumption has been carried, as with 
wheat, to the point where marginal utility is small or even negligible. So it 
must be assumed that the importance of marginal increments of all 
production is low and declining. The effect of increasing affluence is to 
min imize the importance of economic goals. Production and productivity 
become less and less important. 

The concept of diminishing marginal utility was, and remains, one of 
the indispensable ideas of economics. Since it conceded so much to the 
notion of diminishing urgency of wants, and hence of production, it was 
remarkable indeed that the situation was retrieved. This was done—and 
brilliantly. The diminishing urgency of wants was not admitted. In part, 
this was accomplished in the name of refined scientific method which, as 
so often at the higher levels of sophistication, proved a formidable bulwark 
of the conventional wisdom. Obvious but inconvenient evidence was 
rejected on the grounds that it could not be scientifically assimilated. But 
even beyond this, it has been necessary at times simply to close one's eyes 
to phenomena which could not be reconciled with convenience. 



The first step, as noted earlier, was to divorce economics from any 
judgment on the goods with which it was concerned. Any notion of 
necessary versus unnecessary or important as against unimportant goods 
was rigorously excluded from the subject. Alfred Marshall, who on this, as 
on so many other things, laid down the rules to which economists have 
since adhered, noted that "the economist studies mental states rather 
through their manifestations than in themselves; and if he finds they afford 
evenly balanced incentives to action, he treats them prima facie as for his 
purposes equal."- He almost immediately added that this simplification, 
which indeed has rendered profound scientific service to economics, was 
only a "starting-point." But economists ever since have been content to 
stay with his starting point and to make it a mark of scholarly restraint and 
scientific virtue to do so. Nothing is so thoroughly drilled into the minds of 
the young as the need for this restraint. Nothing in economics so quickly 
marks an individual as incompetently trained as a disposition to remark on 
the legitimacy of the desire for more food and the frivolity of the desire for 
a more expensive automobile. 

Next, economics took general cognizance of the fact that an almost 
infinite variety of goods await the consumer's attention. At the more 
elementary (and also the more subjective) levels of economic analysis, it is 
assumed that, while the marginal utility of the individual good declines in 
accordance with the indubitable law, the utility or satisfaction from a new 
and different good is not lower than from the initial units of those 
preceding. So long as the consumer adds new products—seeks variety 
rather than quantity—he may, like a museum, accumulate without 
diminishing the urgency of his wants. Since the average consumer owns 
only a fraction of the different kinds of goods he might conceivably 
possess, there is all but unlimited opportunity for adding such products. 
The rewards to the possessors are more or less proportional to the supply. 
The production that supplies these goods and services, since it renders 
undiminished utility, remains of undiminished importance. 

This position ignores the obvious fact that some things are acquired 
before others and that, presumably, the more important things come first. 
This, as observed previously, implies a declining urgency of need. 
However, in the slightly more sophisticated theory, this conclusion is 
rejected. The rejection centers on the denial that anything very useful can 
be said of the comparative states of mind and satisfaction of the consumer 
at different periods of time. Few students of economics, even in the 


elementary course, now escape without a warning against the error of 
intertemporal comparisons of the utility from given acts of consumption. 
Yesterday the man with a min imal but increasing real income was reaping 
the satisfactions which came from a decent diet and a roof that no longer 
leaked water on his face. Today, after a large increase in his income, he 
has extended his consumption to include cable television and eccentric 
loafers. But to say that his satisfactions from these latter amenities and 
recreations are less than from the additional calories and the freedom from 
rain is wholly improper. Things have changed; he is a different man; there 
is no real standard for comparison. That, as of a given time, an individual 
will derive lesser satisfactions from the marginal increments to a given 
stock of goods, and accordingly cannot be induced to pay as much for 
them, is conceded. But this tells us nothing of the satisfactions from such 
additional goods, and more particularly from different goods, when they 
are acquired at a later time. The conclusion follows. One cannot be sure 
that the satisfaction from these temporally later increases in the 
individual's stock of goods diminishes. Hence, one cannot suggest that the 
production which supplies it is of diminishing urgency. 

A moment's reflection on what has been accomplished will be 
worthwhile. The notion of diminishing utility still serves its indispensable 
purpose of relating urgency of desire and consequent willingness to pay to 
quantity. At any given time the more the individual might have, the less 
would be the satisfaction he would derive from additions to his stock and 
the less he would be willing to pay. The reactions of the community will 
be the aggregate of the reactions of the individuals it comprises. Hence, the 
greater the supply the less the willingness to pay for marginal increments 
and hence, the demand curve familiar to all who have made even the most 
modest venture into economic theory. But, at the same time, the question 
of the diminishing urgency of consumption is elided. For, while the 
question of willingness to pay for additional quantities is based on a 
hypothesis as to behavior in face of these quantities at a given point of 
time, an increase in stock of consumer's goods, as the result of an increase 
in real income, can occur only over time. On the yield of satisfactions from 
this the economist has nothing to say. In the name of good scientific 
method, he is prevented from saying anything. -There is room, however, 
for the broad assumption—given the large and ever-growing variety of 
goods awaiting the consumer's attention—that wants have a sustained 
urgency. In any case, it can safely be concluded that more goods will 
satisfy more wants than fewer goods. And the assumption that goods are 


an important and even an urgent thing to provide stalks unchallenged 
behind, for have not goods always been important for relieving the 
privation of man kin d? It will be evident that economics has brilliantly 
retrieved the dangers to itself and to its goals that were inherent in 
diminishing marginal utility. 

There has been dissent. Keynes observed that the needs of human 
beings "fall into two classes—those needs which are absolute in the sense 
that we feel them whatever the situation of our fellow human beings may 
be, and those which are relative only in that their satisfaction lifts us 
above, makes us feel superior to, our fellows."- However, on this 
conclusion, Keynes made no headway. In contending with the 
conventional wisdom, he, no less than others, needed the support of 
circumstances. And in contrast with his remedy for depressions, this he did 
not yet have. 


ii. The Dependence Effect 

the notion that wants do not become less urgent the more amply the 
individual is supplied is broadly repugnant to common sense. It is 
something to be believed only by those who wish to believe. Yet the 
conventional wisdom must be tackled on its own terrain. Intertemporal 
comparisons of an individual's state of mind do rest on technically 
vulnerable ground. Who can say for sure that the deprivation which afflicts 
him with hunger is more painful than the deprivation which afflicts him 
with envy of his neighbor's new car? In the time that has passed since he 
was poor, his soul may have become subject to a new and deeper searing. 
And where a society is concerned, comparisons between marginal 
satisfactions when it is poor and those when it is affluent will involve not 
only the same individual at different times but different individuals at 
different times. The scholar who wishes to believe that with increasing 
affluence there is no reduction in the urgency of desires and goods is not 
without points for debate. However plausible the case against him, it 
cannot be proven. In the defense of the conventional wisdom, this amounts 
almost to invulnerability. 

However, there is a flaw in the case. If the individual's wants are to be 
urgent, they must be original with himself. They cannot be urgent if they 
must be contrived for him. And above all, they must not be contrived by 
the process of production by which they are satisfied. For this means that 
the whole case for the urgency of production, based on the urgency of 
wants, falls to the ground. One cannot defend production as satisfying 
wants if that production creates the wants. 

Were it so that a man on arising each morning was assailed by demons 
which instilled in him a passion sometimes for silk shirts, sometimes for 
kitchenware, sometimes for chamber pots, and sometimes for orange 
squash, there would be every reason to applaud the effort to find the 
goods, however odd, that quenched this flame. But should it be that his 
passion was the result of his first having cultivated the demons, and should 
it also be that his effort to allay it stirred the demons to ever greater and 
greater effort, there would be question as to how rational was his solution. 
Unless restrained by conventional attitudes, he might wonder if the 
solution lay with more goods or fewer demons. 


So it is that if production creates the wants it seeks to satisfy, or if the 
wants emerge pari passu with the production, then the urgency of the 
wants can no longer be used to defend the urgency of the production. 
Production only fills a void that it has itself created. 


The point is so central that it must be pressed. Consumer wants can have 
bizarre, frivolous or even immoral origins, and an admirable case can still 
be made for a society that seeks to satisfy them. But the case cannot stand 
if it is the process of satisfying wants that creates the wants. For then the 
individual who urges the importance of production to satisfy these wants is 
precisely in the position of the onlooker who applauds the efforts of the 
squirrel to keep abreast of the wheel that is propelled by his own efforts. 

That wants are, in fact, the fruit of production will now be denied by 
few serious scholars. And a considerable number of economists, though 
not always in full knowledge of the implications, have conceded the point. 
In the observation cited at the end of the preceding chapter, Keynes noted 
that needs of "the second class," i.e., those that are the result of efforts to 
keep abreast or ahead of one's fellow being, "may indeed be insatiable; for 
the higher the general level, the higher still are they."- And emulation has 
always played a considerable role in the views of other economists of want 
creation. One man's consumption becomes his neighbor's wish. This 
already means that the process by which wants are satisfied is also the 
process by which wants are created. The more wants that are satisfied, the 
more new ones are bom. 

However, the argument has been carried farther. A leading modern 
theorist of consumer behavior, Professor James Duesenberry, has stated 
explicitly that "ours is a society in which one of the principal social goals 
is a higher standard of living...[This] has great significance for the theory 
of consumption ... the desire to get superior goods takes on a life of its 
own. It provides a drive to higher expenditure which may even be stronger 
than that arising out of the needs which are supposed to be satisfied by that 
expenditure."^ The implications of this view are impressive. The notion of 
independently established need now sinks into the background. Because 
the society sets great store by ability to produce a high living standard, it 
evaluates people by the products they possess. The urge to consume is 

fathered by the value system which emphasizes the ability of the society to 
produce. The more that is produced, the more that must be owned in order 
to maintain the appropriate prestige. The latter is an important point, for, 
without going as far as Duesenberry in reducing goods to the role of 
symbols of prestige in the affluent society, it is plain that his argument 
fully implies that the production of goods creates the wants that the goods 
are presumed to satisfy.- 


The even more direct link between production and wants is provided by 
the institutions of modem advertising and salesmanship. These cannot be 
reconciled with the notion of independently determined desires, for their 
central function is to create desires—to bring into being wants that 
previously did not exist.- This is accomplished by the producer of the 
goods or at his behest. A broad empirical relationship exists between what 
is spent on production of consumer goods and what is spent in 
synthesizing the desires for that production. A new consumer product must 
be introduced with a suitable advertising campaign to arouse an interest in 
it. The path for an expansion of output must be paved by a suitable 
expansion in the advertising budget. Outlays for the manufacturing of a 
product are not more important in the strategy of modern business 
enterprise than outlays for the manufacturing of demand for the product. 
None of this is novel. All would be regarded as elementary by the most 
retarded student in the nation's most primitive school of business 
administration. The cost of this want formation is formidable. In 1987, 
total advertising expenditure—though, as noted, not all of it may be 
assigned to the synthesis of wants—amounted to approximately one 
hundred and ten billion dollars. The increase in previous years was by an 
estimated six billion dollars a year. Obviously, such outlays must be 
integrated with the theory of consumer demand. They are too big to be 

But such integration means recognizing that wants are dependent on 
production. It accords to the producer the function both of making the 
goods and of making the desires for them. It recognizes that production, 
not only passively through emulation, but actively through advertising and 
related activities, creates the wants it seeks to satisfy. 

The businessman and the lay reader will be puzzled over the emphasis 
which I give to a seemingly obvious point. The point is indeed obvious. 
But it is one which, to a singular degree, economists have resisted. They 
have sensed, as the layman does not, the damage to established ideas 
which lurks in these relationships. As a result, incredibly, they have closed 
their eyes (and ears) to the most obtrusive of all economic phenomena, 
namely, modern want creation. 

This is not to say that the evidence affirming the dependence of wants 
on advertising has been entirely ignored. It is one reason why advertising 
has so long been regarded with such uneasiness by economists. Here is 
something which cannot be accommodated easily to existing theory. More 
pervious scholars have speculated on the urgency of desires which are so 
obviously the fruit of such expensively contrived campaigns for popular 
attention. Is a new breakfast cereal or detergent so much wanted if so 
much must be spent to compel in the consumer the sense of want? But 
there has been little tendency to go on to examine the implications of this 
for the theory of consumer demand and even less for the importance of 
production and productive efficiency. These have remained sacrosanct. 
More often, the uneasiness has been manifested in a general disapproval of 
advertising and advertising men, leading to the occasional suggestion that 
they shouldn't exist. Such suggestions have usually been ill received in the 
advertising business. 

And so the notion of independently determined wants still survives. In 
the face of all the forces of modern salesmanship, it still rules, almost 
undefiled, in the textbooks. And it still remains the economist's mission— 
and on few matters is the pedagogy so firm—to seek unquestionably the 
means for filling these wants. This being so, production remains of prime 
urgency. We have here, perhaps, the ultimate triumph of the conventional 
wisdom in its resistance to the evidence of the eyes. To equal it, one must 
imagine a humanitarian who was long ago persuaded of the grievous 
shortage of hospital facilities in the town. He continues to importune the 
passersby for money for more beds and refuses to notice that the town 
doctor is deftly knocking over pedestrians with his car to keep up the 

And in unraveling the complex, we should always be careful not to 
overlook the obvious. The fact that wants can be synthesized by 
advertising, catalyzed by salesmanship, and shaped by the discreet 

manipulations of the persuaders shows that they are not very urgent. A 
man who is hungry need never be told of his need for food. If he is 
inspired by his appetite, he is immune to the influence of Messrs. Batten, 
Barton, Durstine & Osbom. The latter are effective only with those who 
are so far removed from physical want that they do not already know what 
they want. In this state alone, men are open to persuasion. 


The general conclusion of these pages is of such importance for this essay 
that it had perhaps best be put with some formality. As a society becomes 
increasingly affluent, wants are increasingly created by the process by 
which they are satisfied. This may operate passively. Increases in 
consumption, the counterpart of increases in production, act by suggestion 
or emulation to create wants. Expectation rises with attainment. Or 
producers may proceed actively to create wants through advertising and 
salesmanship. Wants thus come to depend on output. In technical terms, it 
can no longer be assumed that welfare is greater at an all-round higher 
level of production than at a lower one. It may be the same. The higher 
level of production has, merely, a higher level of want creation 
necessitating a higher level of want satisfaction. There will be frequent 
occasion to refer to the way wants depend on the process by which they 
are satisfied. It will be convenient to call it the Dependence Effect. 

We may now contemplate briefly the conclusions to which this 
analysis has brought us. 

Plainly, the theory of consumer demand is a peculiarly treacherous 
friend of the present goals of economics. At first glance, it seems to defend 
the continuing urgency of production and our preoccupation with it as a 
goal. The economist does not enter into the dubious moral arguments 
about the importance or virtue of the wants to be satisfied. He doesn't 
pretend to compare mental states of the same or different people at 
different times and to suggest that one is less urgent than another. The 
desire is there. That for him is sufficient. He sets about in a workmanlike 
way to satisfy desire, and accordingly, he sets the proper store by the 
production that does. Like woman's, his work is never done. 

But this rationalization, handsomely though it seems to serve, turns 
destructively on those who advance it once it is conceded that wants are 


themselves both passively and deliberately the fruits of the process by 
which they are satisfied. Then the production of goods satisfies the wants 
that the consumption of these goods creates or that the producers of goods 
synthesize. Production induces more wants and the need for more 
production. So far, in a major tour de force, the implications have been 
ignored. But this obviously is a perilous solution. It cannot long survive 

Among the many models of the good society, no one has urged the 
squirrel wheel. Moreover, as we shall see presently, the wheel is not one 
that revolves with perfect smoothness. Aside from its dubious cultural 
charm, there are serious structural weaknesses which may one day 
embarrass us. For the moment, however, it is sufficient to reflect on the 
difficult terrain which we are traversing. In Chapter 8, we saw how deeply 
we were committed to production for reasons of economic security. Not 
the goods but the employment provided by their production was the thing 
by which we set ultimate store. Now we find our concern for goods further 
undermined. It does not arise in spontaneous consumer need. Rather, the 
dependence effect means that it grows out of the process of production 
itself. If production is to increase, the wants must be effectively contrived. 
In the absence of the contrivance, the increase would not occur. This is not 
true of all goods, but that it is true of a substantial part is sufficient. It 
means that since the demand for this part would not exist, were it not 
contrived, its utility or urgency, ex contrivance, is zero. If we regard this 
production as marginal, we may say that the marginal utility of present 
aggregate output, ex advertising and salesmanship, is zero. Clearly the 
attitudes and values which make production the central achievement of our 
society have some exceptionally twisted roots. 

Perhaps the thing most evident of all is how new and varied become 
the problems we must ponder when we break the nexus with the work of 
Ricardo and face the economics of affluence of the world in which we live. 
It is easy to see why the conventional wisdom resists so stoutly such 
change. It is far, far better and much safer to have a firm anchor in 
nonsense than to put out on the troubled seas of thought. 

12. The Vested Interest in Output 

the notion of a vested interest has an engaging flexibility in our social 
usage. In ordinary intercourse, it is an improper advantage enjoyed by a 
political minority to which the speaker does not himself belong. When the 
speaker himself enjoys it, it ceases to be a vested interest and becomes a 
hard-won reward. When a vested interest is enjoyed not by a minority but 
a majority, it is a human right. These conceptual pitfalls notwithstanding, 
the time has come for a survey of the vested interests in our present 
attitudes toward production. Who is most dependent on the present 
illusion? Who will be most affected when, under the onslaught of ideas, 
circumstances and time itself, these matters come to appear in a clearer 
light? As a general makes a reconnaissance of the opposing forces, the 
author should know who is dug in against him. 

Without question, the individual with the greatest stake in the present 
economic goals is the businessman—more precisely, perhaps, the 
important business executive. If production is of preoccupying importance, 
he, as the man with the traditional and established right to the title of 
producer, will be the dominant figure in the social constellation. Society 
will accord him prestige appropriate to the role he plays; what may well be 
less important, he will be able, without difficulty or criticism, to command 
an income that is related to his prestige. As production has increasingly 
monopolized our economic attitudes, the business executive has grown in 
esteem. So long as inequality was a matter of serious concern, the tycoon 
had, at best, an ambiguous position. He performed a function of obvious 
urgency. But he was also regularly accused of taking far too much for his 
services. As concern for inequality has declined, this reaction has 
disappeared. The businessman is no longer subject to a serious challenge 
of any sort. Although in his hierarchical role in the large corporation he 
has, perhaps, been more successful than most in eliminating economic 
insecurity, both personal and institutional, he has even managed to retain a 
certain cachet as a risk-taker, a man who lives dangerously. No one 
questions the superior position of the businessman in American society. 
But no one should doubt that it depends on the continuing preoccupation 
with production. 

The case of water under conditions of plenty and shortage has been 
mentioned before. Many years ago, the City of New York suffered from a 


potentially troublesome water shortage. Clouds were watched anxiously 
and seeded in the hope that they might yield their burden. With fanfare, a 
program of water conservation was launched. The washing of automobiles, 
dripping of faucets, sluicing of streets and cooling of air were all 
prohibited. Presiding over the considerable publicity which these results 
required was the New York City water commissioner, Mr. Stephen J. 
Carney. For the time, he was the most important man in the metropolis. 
His name was on everyone's tongue. Mr. Carney was a public figure. Then 
the rains came, and the reservoirs filled. Carney was forgotten. One day he 
was quietly dropped. No one noticed. 

The title of producer in our society seems securely honorific. The head 
of a distillery, a casino or a dog track is a producer. He is not a basic 
producer which is better, but a producer nonetheless. As such, he enjoys a 
position in the community as one of its supports or pillars and the sources 
of its wealth that is not necessarily enjoyed by the high school principal or 
the parish priest. It is as a producer that the President of General Electric 
calls on the President of the United States. It is thought good, on the 
whole, for a department of the government to be in the hands of a 
production man. Nothing better can be said of any individual than that he 
knows production. But the prestige of the producer is only the prestige of 
production. Should production ever come to be taken for granted, so, in 
some measure, will the producer. Mr. Carney is a warning. 


Men fight for what is important to them, and the businessman who senses 
his self-interest will battle vigorously for a value system which emphasizes 
the importance of production. Indeed, and perhaps more intuitively than 
otherwise, he already does. The business liturgy accords an important 
place to resonant assertions of the vital role of production. "Only the 
productive can be strong. Only the strong can be free." "Production made 
America..." "Let us stop bickering and produce." 

The businessman, with many exceptions, has for long been suspicious 
of the state—or at least of those activities of the state, the national defense 
being such an exception, which do not usefully provide him with markets 
and support to needed research and development. This, it has always been 
assumed, is because he is an important taxpayer and vulnerable to 

regulation. But we are too addicted in our social comment to this kind of 
mechanical economic determinism. Modern government is a major threat 
to the businessman's prestige. To the extent that problems of conservation, 
education and social welfare are central to our thoughts, so the 
administrators, teachers and other professional public servants are the 
popular figures. As their prestige, along with that of the men who are 
associated with the problems and disasters of foreign policy, has increased, 
businessmen have reacted by pointing out that the government does not 
produce anything, that it is a barren whore. "Government is powerless to 
create anything in the sense in which business produces wealth and 
individuals produce ideas [and] inventions..."- The case involves some 
rather strained argument—it makes education unproductive and the 
manufacturer of school desks productive—but, nonetheless, it has a 
position of considerable prominence, especially in the older business 

A tension, perhaps ultimately more important, has also long existed 
between businessmen and the intellectuals. "The emergence of a numerous 
class of... frivolous intellectuals is one of the least welcome phenomena of 
the age of modern capitalism. Their obtrusive stir repels discriminating 
people. They are a nuisance." - As in the case of the government, the basis 
of the tension has long been assumed to be economic. "The men whose 
research has given rise to new methods of production hate the businessmen 
who are merely interested in the cash value of their research work. It is 
very significant that such a large number of American research physicists 
sympathize with socialism and communism ... University teachers of 
economics are also opposed to what they disparagingly call the profit 
system... However, although the actual or suspected social radicalism of 
intellectuals may well contribute to hostility between businessmen and 
intellectuals, there is again another cause. Scientists, writers, professors, 
artists are also important competitors of the businessmen for public 

This competition is especially noticeable in comment on public affairs 
—on economic policy, foreign policy, the effect of government measures 
on popular morals and behavior. Perhaps the most honorific function in 
our time is that of social prophecy. No one enjoys quite such distinction as 
the man who, by common consent, is allowed to look ahead and advise as 
to what we should do to promote or retard a particular occurrence. The 
intellectual naturally assumes his authority on these matters. He is likely to 


be gifted well beyond the businessman in erudition and oral capacity. That 
felicity the businessman counters by stressing his identification with 
production. He is not a "theorist" but a practical man. His is the forthright 
approach of the man who knows how to get things done. He has learned 
about life in the shop; this has provided him with a unique insight into how 
things are in the country at large or the world. Were anything to happen to 
the prestige of production, it is plain that the businessman, whose mystique 
is his identification with production, would suffer severely in his 
competition with the intellectual for the role of social prophet. If he wishes 
to defend himself in his present role, he must defend the importance of 
production. He can almost certainly be expected to do so. 

There will be occasion presently for a further word on the competition 
between the businessman and the intellectual for contemporary esteem. 


Politics have long been known to make incongruous bedfellows. More 
rarely, however, have those between the same sheets remained largely 
unaware of their intimate if odd companionship. This is the strange case 
with the vested interests in production. Supporting the businessman on the 
all-importance of the production of goods was for long the American 
liberal. The prestige which the businessman derives from production was 
reinforced by the nearly full weight of American liberal comment. The 
reason for this alliance, though it requires some explanation, was not 
essentially complex. Men who hold tenaciously to a life raft may expect to 
be cast upon strange shores among strange companions. So it is with those 
who hold long enough to an idea amid changing currents and tides. As so 
often happens, the course of developments in Britain, in broad contour if 
not in detail, has been the same as in the United States. 

Until the decade of the thirties, the liberal, so far as he was concerned 
with the total output of the economy, addressed himself to the problem of 
the efficient use of the available resources in capital, manpower and 
materials. He insisted not without passion that this goal be not defeated by 
monopoly, tariffs, labor or capital immobility, or other interferences with 
optimal use. To increase output by increasing the rate of capital formation 
or by expanding the total labor force or by a serious effort to increase the 
rate of technological inn ovation was not part of his concern.- Most 


important of all, the loss of production as the result of depressions was not 
peculiarly a liberal concern. No one was deeply committed politically on 
this problem; conservatives had an equal interest with liberals in 
"smoothing out" the business cycle. During the decade of the twenties, the 
political leadership in discussion of possible means to mitigate the 
business cycle was assumed by Herbert Hoover. 

The classical program of American liberals, until the decade of the 
thirties, sought the redistribution of the existing income, greater economic 
security and the protection of the liberties and immunities of individuals 
and organizations in face of the highly unequal distribution of economic 
power. The progressive income tax; the development of government 
services; the protection of public resources from private appropriation; the 
extensions of social security; aid to farmers or other especially 
disadvantaged groups; the strengthening of trade unions; and the 
regulation of corporations all served these ends. None of these measures 
was thought much to affect the total output of the economy. 

All this changed very much during the decade of the thirties. The great 
depression brought production to a very low level. Between 1929 and 
1933, the gross output of the private economy dropped by between a third 
and a half. The sheer magnitude of this movement focused attention, as 
never before, on movements in the total output of the economy and on 
their far-reaching consequences for economic and political fortune. 
Characteristically, to increase production was less central to men's 
thoughts than to reduce unemployment. "Our greatest primary task is to 
put people back to work," Roosevelt said in his first inaugural. But 
whether directly or as a by-product of the effort to reduce economic 
insecurity, expanded production began to acquire a growing significance to 
political liberalism in its American sense. 

Then in 1936 came John Maynard Keynes. In the Keynesian system, 
the notion of an aggregate demand for the output of the economy which 
determined the total production of the economy was central. Depending on 
various factors, production might find its equilibrium at a high level or a 
low one. There was no immutable tendency for it to settle at the particular 
level where all willing workers had a chance for employment. And by 
manipulating the level of aggregate demand—the most obvious devices 
were to add to demand by government spending in excess of taxation, or to 
subtract from it by taxation in excess of spending—the government could 


influence the level of production. 

The rewards from a successful operation on the level of output were 
breathtaking. To increase production was to ameliorate unemployment, 
agricultural insecurity, the threat of bankruptcy to the small businessman, 
the risks of investors, the financial troubles of the states and cities, even, 
somewhat, the overcrowding which results when people cannot afford to 
own or rent their own homes and must double up. Scarcely a single social 
problem was left untouched. And within a few years after Keynes, the 
level of production became the critical factor in war mobilization. It was 
principally increased output that provided the military requirements of 
World War II. 

As a result, production did more than impress the liberal. It became his 
program, and it established something akin to a monopoly over his mind. 
Here was perhaps the nearest thing to alchemy that had ever been seen in 
the field of politics. Increased production solved, or seemed to solve, 
nearly all of the social problems of the day. 

Furthermore, at least for a time, the practical concern for the total 
output of the economy was a liberal franchise. Conservatives hesitated to 
abandon the balanced budget, for so long a canon of the conventional 
wisdom.- Yet to do so was essential. To manipulate the level of production 
also meant that the role of government must be enlarged. This too was 
unpalatable to conservatives, for it accorded a prestige to government 
which had previously been accorded exclusively to private production. 

Most important of all for its influence on the liberal mind, the promise 
to raise production and reduce unemployment won elections. From the late 
thirties to the early fifties, the promise to maintain high production and 
therewith high employment was the liberal's major claim to votes in the 
United States, and it was unbeatable. Very nearly the same thing was true 
of the left in Britain. The promise to "get this country moving again," i.e., 
to increase production at a faster rate, helped win public office for John F. 
Kennedy in 1960. The promise continues. 

One must notice here another feature of the liberal's position. The issue 
on which he won during the thirties and which continued to bring him 
victories for another decade was the promise of the increased production 
that eliminated unemployment. This was something of massive 
importance. But having discovered production, he remained with it. He 


continued to stress the importance of increased output in periods when that 
involved not the elimination of gross unemployment but the increase in 
output of the already employed. He believed, in brief, that increased 
production remained the touchstone of political success even when it 
involved additions to an already opulent supply of goods. Between 
increases in production that cure widespread unemployment and increases 
in production that add to affluence, there is a difference not in degree but 
in kind. In continuing to emphasize production, liberals, who once had a 
great issue, came without realizing it to possess a much smaller one. Yet 
this is not surprising. No less than any others, liberals accepted the 
elaborate rationalization by which we persuade ourselves of the continued 
urgency of additions to our stock of consumer's goods. 

However, this is a digression. For present purposes, we need only 
observe that Keynes concentrated the eyes of liberals on production, and 
their political successes gave them a vested interest in it. Keynesian 
attitudes became, as ever, the new conventional wisdom.- 


Or such was the unchallenged wisdom until recent times. Browning 
observed that "Jove strikes the Titans down, not when they set about their 
mountain-piling but when another rock would crown their work." So with 
production. At the moment when its position seemed invulnerable, when it 
was supported by the deeply vested interest of conservative executives and 
liberal intellectuals, cracks were appearing in the facade. In these last 
years, they have widened. That the preoccupation with production qua 
production is still formidable, of that there can be no doubt. It has inherited 
the concern once felt for equality and the poor. It is still powerfully 
reinforced by the service it renders to economic security. It is still 
rationalized by an elaborate and traditional, even if meretricious, theory of 
consumer demand. But, for businessmen, production no longer means 
secure prestige. For liberal politicians, it is no longer a certain formula for 
public office. 

The prestige of production depends on the prestige of goods. In the 
more censorious social levels of American society, there has long been a 
fashionable aversion to gadgetry. (The word gadget is itself a pejorative 
term for durable goods.) In such circles, shiny rumpus rooms, imaginative 


barbecue pits, expansive television screens and magnificent automobiles 
no longer win acclaim. They may even invite mild social obloquy. A 
degree of shabbiness in personal attire is now sought, and all but 
universally among the young. Against more output and more jobs is now 
set the effect on the environment. On occasion, that effect is controlling. 
We have here a yet small but still significant revolt against goods, and a 
refusal to allow competitive emulation to be the source of wants. 

Even more suggestive is the belief of the businessman that his position 
in the community is slipping.- The rise of the public relations industry, 
which draws its clientele overwhelmingly from among business 
executives, shows that business achievement is no longer of itself a source 
of acclaim. At a minimum, the achievement must be advertised. But the 
first task of the public relations man, on taking over a business client, is to 
"re-engineer" his image to include something besides the production of 
goods. His subject must be a statesman, a patron of education, or a civic 
force. Increasingly, some artistic or intellectual facet of his personality 
must be found or invented. A businessman who reads Business Week is 
lost to fame. One who reads Proust is marked for greatness. 

These added requirements for esteem are unquestionably related to 
changing attitudes toward goods. In the early years of the automobile age, 
it was sufficient for Henry Ford and R. E. Olds that they were makers of 
cars. What indeed could be a source of more acclaim? Now the automobile 
has become commonplace. And in the more recherche attitudes, it is even 
unfunctional in its shape and decoration. It is easy to see why the modem 
car manufacturer does not enjoy the eminence of a Ford or an Olds. 

As noted, the intellectual, along with the public official and politician, 
is the natural competitor of the businessman for what may be called the 
solemn acclaim of the community.- (Neither competes with Hollywood, 
football, television commentators or jet society for what both agree is the 
frivolous applause of the community.) In fact, the position of the 
intellectual is now far more secure than that of the businessman. It would 
hardly occur to a successful poet or scientist to hire a public relations man, 
just as it would scarcely seem wise for a successful corporation president 
to do without one. Although the businessman must, increasingly, show that 
he is at home with ideas, it does not occur to the philosopher or artist that 
he should show that he is a good businessman. Perhaps most suggestive of 
all, American intellectuals long ago created what amounts to a second- 


class citizenship for the intellectual efforts of the business executive. They 
listen to his speeches, review his books and receive his ideas with 
respectful attention. But they do not judge them to be good or bad in 
themselves. They are good (or on occasion bad) for a businessman. It is 
well understood that this is a much lower standard. 

Finally, the modern liberal no longer identifies production with all 
political success. A satisfactory increase in Gross Domestic Product 
remains the first test of accomplishment. No one should doubt the 
convenience of a simple arithmetical measure of success in a world in 
which so many things are subjective. But it is no longer unusual to inquire 
about the quality of life as opposed to the quantity of production. And a 
younger generation has become concerned with questions of racial 
equality, the quality of the environment, the role of the great public and 
private bureaucracies in our lives and in shaping our beliefs and our 
prospects for survival, and there has been a simmering of interest in the 
honesty of artistic and intellectual expression. 

None of this is yet decisive. The purpose of the society is still to 
produce. This is still its serious business. To be a producer is still to be the 
truly useful man. Economic success is still the test of whether one is fully 
to be trusted in Washington—or on the governing body of a university. If 
the vested position of production is no longer completely secure, one can 
still marvel at the way it has survived the enormous increase in the output 
of goods in modern times. Men, in this world, share little in common with 
the meager and starved existence of the days of Ricardo. But their belief as 
to what is important is the same. It is a remarkable tribute to man's 
capacity to protect the beliefs that are important for him. In doubting the 
supreme power of production, we are still challenging a myth of heroic 


13. The Bill Collector Cometh 

the situation is this. Production for the sake of the goods produced is no 
longer very urgent. The significance of marginal increments (or 
decrements) in the supply of most goods is slight for most people.- We 
sustain a sense of urgency only because of attitudes that trace not to the 
world of today but to that into which economics was born. These are 
reinforced by an untenable theory of consumer demand and by a system of 
vested interests which marries both liberals and conservatives to the 
importance of production. 

At the same time, production does remain important and urgent for its 
effect on economic security. When men are unemployed, society does not 
miss the goods they do not produce. The loss here is marginal. But the men 
who are without work do miss the income they no longer earn. Here the 
effect is not marginal. It involves all or a large share of the men's earnings 
and hence all or a large share of what they are able to buy. And, we note, 
high and stable production is the broad foundation of the economic 
security of virtually every other group—of farmers, white collar workers 
and both large businessmen and small. A recession in demand and 
production remains the major uncovered risk of the modem large 
corporation.^ It is for reasons of economic security that we must produce 
at capacity. 

These simple conclusions are not well regarded by the conventional 
wisdom. To urge the importance of production because of its bearing on 
economic security, and to suggest that the product is in any way incidental, 
is disturbing. It brings the economic society to the brink of the dubious 
world of make-work and boondoggling. One of the escapes from this 
world is to make all wants urgent, and no doubt we have here another 
reason for the obscurantist rationalization of consumer demand. It still 
seems more satisfactory to say that we need the goods than to stress the 
real point, which is that social well-being and contentment require that we 
have enough production to provide income to the willing labor force. But 
if anyone has surviving doubts as to where the real priorities lie, let him 
apply a simple test. Let him assume that a President, or other candidate for 
reelection to major public office, has the opportunity of defending a large 
increase in man-hour productivity which has been divided equally between 
greatly increased total output and greatly increased unemployment. And let 


it be assumed that as an alternative he might choose unchanged 
productivity which has left everyone employed. That full employment is 
more desirable than increased production combined with unemployment 
would be clear alike to the most sophisticated and the most primitive 

The foregoing provides the basic rule of procedure for the remainder of 
this essay. It shows that, in the absence of a genuine grading up of lower 
incomes, we need not be much concerned with the supply of goods for 
their own sake. The urgencies here are founded not on substance but on 
myth. And, indeed, our ultimate purpose is to see the opportunities that 
emerge as this myth is dispelled. But in all this we must be exceedingly 
conscious of the importance of production for its bearing on the economic 
security of individuals. As a source of income for people, its importance 
remains undiminished. This function of production must be carefully 

But myth is rarely benign. And the system of illusions which causes us 
to attach such importance to production for its own sake is itself damaging 
or dangerous. And the way that present attitudes cause us to emphasize the 
supply of private as distinct from all goods and services is the source of 
deeper social dangers. To these problems, beginning with those inherent in 
the present methods of manufacturing wants, this essay now turns. 


One danger in the way wants are now created lies in the related process of 
debt creation. Consumer demand thus comes to depend more and more on 
the ability and willingness of consumers to incur debt. 

An increase in consumer debt is all but implicit in the process by 
which wants are now synthesized. Advertising and emulation, the two 
dependent sources of desire, work across the society. They operate on 
those who can afford and those who cannot. With those who lack the 
current means, it is a brief and obvious step from stimulating their desire 
by advertising to making it effective in the market with a loan. The relation 
of emulation to indebtedness is even more direct. Every community 
contains individuals with wide differences in their ability to pay. The 
example of those who can pay bears immediately on those who cannot. 
They must incur debt if they are to keep abreast. The great increase in 


consumer indebtedness in our time has been widely viewed as reflecting 
some original or unique change in popular attitudes or behavior. People 
have changed their view of debt. Thus there has been an inexplicable but 
very real retreat from the Puritan canon that required an individual to save 
first and enjoy later. In fact, as always, the pieces of economic life are 
parts of a whole. It would be surprising indeed if a society that is prepared 
to spend thousands of millions to persuade people of their wants were to 
fail to take the further step of financing these wants, and were it not then to 
go on to persuade people of the ease and desirability of incurring debt to 
make these wants effective. This has happened. The process of persuading 
people to incur debt, and the arrangements for them to do so, are as much a 
part of modern production as the making of the goods and the nurturing of 
the wants. The Puritan ethos was not abandoned. It was merely 
overwhelmed by the massive power of modern merchandising. 

Viewing this process as a whole, we should expect that every increase 
in consumption will bring a further increase—possibly a more than 
proportional one—in consumer debt. Our march to higher living standards 
will be paced, as a matter of necessity, by an ever deeper plunge into debt. 
The evidence is already impressive. The increase in living standards in the 
twenties was accompanied by a relatively much greater increase in 
consumer borrowing. The same was true during the years of recovery in 
the thirties. It has been most spectacularly the case since World War II. 
From 1952 to 1956, total consumer debt (not including real estate loans) 
increased from $27.4 billion to $42.5 billion or by 55 percent. Installment 
credit increased by 63 percent and that for automobiles by nearly 100 
percent. Although these were prosperous years, disposable income of 
individuals increased by only about 21 percent. From 1956 to 1967, 
consumer debt increased from $42.5 billion to $99.1 billion or by a further 
133 percent. Installment credit increased from $31.7 billion to $77.9 
billion or by 146 percent and automobile paper from $14.4 billion to $31.2 
billion or by 117 percent. During these same twelve years, disposable 
personal income increased from $293.2 billion to $544.6 billion or by 86 
percent.- These trends continued into the nineteen-seventies and beyond. 
By 1974, total consumer debt was over $190 billion, of which $156 billion 
was installment credit, $52 billion of this in automobile paper. Disposable 
personal income was 80 percent higher at $980 billion; total credit, 
however, had grown by 92 percent, installment credit by 100 percent. 
Automobile paper, affected by gasoline prices and shortage, had increased 
64 percent. (By 1998, as this edition goes to press, there had been another 


large increase.) 

One wonders, inevitably, about the tensions associated with debt 
creation on such a massive scale. The legacy of wants, which are 
themselves inspired, are the bills which descend like the winter snow on 
those who are buying on the installment plan. By millions of hearths 
throughout the land, it is known that when these harbingers arrive, the 
repossession man cannot be far behind. Can the bill collector or the 
bankruptcy lawyer be the central figure in the good society? 

In 1955, the median income of the American family before taxes was 
$3960. Of all families within the income range from $3000 to $4000, 48 
percent had installment payments to meet. For nearly a t hir d of those, the 
payments commanded more than a fifth of the family income before taxes. 
Among families in the next lower bracket—with incomes from $2000 to 
$3000—42 percent had payments to make. Of these in turn, 42 percent had 
committed at least a fifth of their income for installment payments, and 
one family in nine surrendered 40 percent or more of its income to the bill 
collector.- Between 1960 and 1964, at least one family in ten in the United 
States had installment payments that consumed a fifth or more of its 
income.- On the desirability of this, each must decide according to his own 
values. But there are associated economic dangers which are less 


In a society where virtuosity in persuasion must keep pace with virtuosity 
in production, one is tempted to wonder whether the first can forever keep 
ahead of the second. For while production does not clearly contain within 
itself the seeds of its own disintegration, persuasion may. On some not 
distant day, the voice of each individual seller may well be lost in the 
collective roar of all together. Like injunctions to virtue and warnings of 
socialism, advertising will beat helplessly on ears that have been 
conditioned by previous assault to utter immunity. Diminishing returns 
will have operated to the point where the marginal effect of outlays for 
every kind of commercial persuasion will have brought the average effect 
to zero. It will be worth no one's while to speak, for since all speak, none 
can hear. Silence, interrupted perhaps by brief, demoniacal outbursts of 
salesmanship, will ensue. 


Were this heroic eventuality to occur, there would, unquestionably, be 
some interesting problems of economic readjustment. There would be a 
counterpart increase in consumer saving as the unpersuaded allowed their 
bank balances to grow and repaid their debts. Unless these increased 
savings were speedily offset by increased outlays elsewhere—and the day 
on which the massed voices of the advertisers bring total cancellation of 
effect will not be one of supreme business confidence and burgeoning 
investment spending—the result would be a decline in total spending and, 
therewith, in the total output of the economy. The further and more painful 
consequence would be an increase in unemployment and a reduction in 
other incomes—in brief, a serious curtailment of the social security of 
which production has become the servant.- 

The less imaginative dangers arise in connection with consumer 
borrowing. Here trouble is already foreseeable. Indeed, it has already been 
accorded a degree of recognition in the conventional wisdom which has 
taken the usual form of assurances that there are no grounds for concern. 

As we expand debt in the process of want creation, we come 
necessarily to depend on this expansion. An interruption in the increase in 
debt means an actual reduction in demand for goods. Debt, in turn, can be 
expanded by measures which, in the nature of the case, cannot be 
indefinitely continued. Periods for payment can be lengthened, although 
eventually there comes a point when they exceed the life of the asset 
which serves as the collateral. Down payments can be reduced, but 
eventually there comes a point when the borrower's equity is so small that 
he finds it more convenient to allow repossession than to pay a 
burdensome debt or declare bankruptcy. Poorer and poorer credit risks can 
be accommodated, but at last it becomes necessary to exclude the borrower 
who does not choose to pay. 

No one can speak with confidence on the extent of the resulting 
danger. However, few things are more satisfactorily established in 
economics than that debt creation, whether by producers or consumers, is a 
major source of uncertainty in economic behavior. It has long been 
recognized that times of high income and employment and a generally 
sanguine outlook are encouraging to both borrowers and lenders. The 
spending that results from these transactions adds to the general total of 
purchasing power when, in effect, it is least needed. Under less sanguine 
circumstances, loans are advanced more cautiously. Instead of spending 

from new loans, there is repayment of old ones and this, as perversely as in 
prosperity, occurs at the least propitious time. 

Borrowing, in the past, has been mainly by business firms for 
investment. For this reason, business spending was regarded as the most 
mercurial of the three major categories of spending. Outlays by consumers 
and by government were, by contrast, regarded as comparatively reliable. 
"There is ... general agreement that [general fluctuations in employment] 
show themselves predominantly in swings in the demand for labour for 
investment—chiefly for investment in works of construction. 
"...Movements in income, output, and employment are mainly 
characterized by fluctuations in the rate of real investment. Moreover, 
consumption rises or falls, in large part, in response to real investment. "- 
The effect of the expansion of consumer credit is to add an uncertainty, 
paralleling that which business borrowing brings to business spending, to 
the hitherto more reliable consumer spending. The instability may be 
greater, for the terms of consumer credit will be eased—down payments 
reduced and repayment periods lengthened—as an aspect of competitive 
merchandising techniques. In the case of business investment, this may be 
less likely to occur. 

In any case, consumers will add the most spending from borrowed 
funds to their spending from current income during the period when it is 
least needed. And it is plain that a family that has committed 40 or even 20 
percent of its income to installment payments will have to cut its current 
spending appreciably if one or more of its income earners lose their job 
and it does not wish to resort to bankruptcy. Thus an increase in 
unemployment, accompanied by the fear that it might get worse, could 
induce a general effort to avoid new debt and reduce the old. The further 
effect on consumer spending, thereafter on employment, and thence once 
again in reducing borrowing and magnifying efforts to meet debts, could 
be considerable and disagreeable. 


By virtue of position, certain individuals in our society are accorded the 
privilege of stating as fact what, in the nature of things, is unknowable. 
The tycoon and college president have well-recognized rights along these 
lines. Any candidate for public office may distinguish with clarity between 


actions which will lead to unlimited prosperity and those which will lead 
to utter ruin. Secretaries of State may tell us by which actions our lives and 
liberties will be preserved to near eternity and those by which they and we 
will be destroyed. In all instances, those privileged as prophets are 
permitted to identify salvation with the action which at the moment they 
find most expedient. To a remarkable extent, considering their much more 
humble status, economists are allowed to tell what present trends in society 
will culminate in deep trouble and distress. In consequence, it would be 
entirely permissible to foresee the gravest resuits from the way consumer 
demand is now sustained by the relentless increase in consumer debt. 

In the course of its study of consumer credit back in 1956, the Board of 
Governors of the Federal Reserve System concluded that while "relatively 
little is known about the safety margins in the finances of consumers who 
borrow on a short-term and intermediate-term instalment basis ... the 
evidence of a trend over past decades toward more liberal terms suggests 
that these margins are less than in earlier years." Then, without throwing 
caution to the winds, it warned that "the possibility of an episode of drastic 
and spiraling liquidation [of this credit] should not be dismissed." 
Thereafter, for purposes of practical action, it did dismiss it. 

In fact, we do not really know the extent of the danger. A tendency to 
liquidation of consumer debt, with accompanying contraction in current 
spending, could be offset by prompt and vigorous government action to cut 
taxes, increase public outlays and so compensate with spending from other 
sources. On the other hand, such measures are subject to both 
psychological and procedural delays. Nothing in our economic policy is so 
deeply ingrained, and so little reckoned with by economists, as our 
tendency to wait and see if things do not improve by themselves. In a time 
of receding income, the income tax reduces itself automatically. Social 
security, farm and other payments have a similarly automatic tendency to 
expand. But taxation and expenditure beyond the range of these automatic 
stabilizers require Executive and Congressional action. Such decision and 
action could be in a radically slower tempo from that of debt liquidation 
and the consequent slump in spending. 

A possibility of trouble is not a prediction of trouble. Not many, if told 
of the vast expansion in consumer debt when it lay ahead, would have 
thought it safe. Perhaps the expansion can continue and possibly it will one 
day taper off in benign fashion. But we would do well to keep an alarm 


signal flying over the consumer-debt creation into which the process of 
want creation impels us. In a society in which the production and sale of 
goods seem sacrosanct, there will be extreme hesitation over measures 
which will seem to restrain the financing of consumer's goods and hence 
their sale. Measures to prevent the competitive liberalization of consumer 
credit will encounter the heaviest resistance. When regarded in relation to 
the underlying interest in stability and economic security, such 
precautionary measures have a much stronger claim for attention. They 
promise to help keep the process of synthesizing demand and the 
purchasing power to make it effective from damaging the continuity of 
production and employment. (Since these words were written some forty 
years go, there has, indeed, been a huge increase in consumer debt (and 
also in citizen bankruptcy). So far we have survived. Nonetheless the 
warning here is still relevant—and possibly more prescient.) 

Though such regulation is a commonplace in the United Kingdom and 
has been used in the past in the United States in wartime, it is unlikely to 
be authorized in the future except in the aftermath of disaster. Interference 
with the process of want creation cum debt creation will be thought wrong. 


There is a deeper social aspect to the economy of consumer credit and the 
bill collector. Not all goods and services are readily subject to sale on the 
installment plan and to the all but automatic creation of debt that goes 
therewith. Automobiles, vacuum cleaners, television sets and wall-to-wall 
carpeting are; the services of schools, hospitals, libraries, museums, police 
and street-cleaning equipment and rapid transit lines are not. If the capital 
cost of these last is beyond the convenient reach of current income, there is 
no equally easy way of going into debt. On the contrary, the controls on 
this kind of borrowing—debt limitations, provision for voter approval of 
bond issues—are Draconian. The encouragement to indebtedness which 
the society accords to the man who wants to buy an automobile or even 
take a trip is matched by the stem mistmst with which it views the local 
government that might want to borrow for a school. The individual has an 
instinct for good living that should be encouraged; the government for 
prodigality against which all must be protected. 

It follows that there is a remarkable discrimination between different 


classes of goods and services in the ease with which they can be financed. 
For some, and by any abstract test not the most important, debt is greatly 
encouraged. For others, and not the least important, it is closely controlled 
and penuriously viewed. Here, as also in pages to come, we see the most 
singular feature of the affluent society taking form. It is the great and 
comprehensive contrast between the care and encouragement which it 
lavishes on the production of private goods and the severe restraint which 
it imposes on those that must emerge from the public sector. 


14. Inflation 

through most of man's history, the counterpart of war, civil disorder, 
famine or other cosmic disaster has been inflation. In recent times, 
inflation has acquired new habits; it has persisted in periods of peace, in 
periods of decline and stagnation and in periods of high and rising 
prosperity. This tendency has been strongly manifest in the United States. 
Except for a few years in the early sixties and, more debatably, in the early 
seventies inflation was a continuing feature of American life after World 
War II. The experience of the mid-seventies made the earlier inflation 
seem mild. 

The public response to inflation is interesting. It is widely deplored and 
condemned. Politicians of both parties have taken a strong position against 
it. Conservatives, anciently the self-designated custodians of the "honest 
dollar," have continued to stress this tenet of their faith. Businessmen, 
bankers, insurance executives and nearly every type of professional public 
spokesman at one time or another have warned of the dangers of continued 
inflation. Meanwhile, liberals have deplored failure to take effective action 
while often proposing none themselves. Next only to the virtues of 
competition, there is nothing on which the conventional wisdom is more 
completely agreed than on the importance of stable prices. Yet this 
conviction leads to remarkably little effort and, indeed, to remarkably few 
suggestions for specific action. Where inflation is concerned, nearly 
everyone finds it convenient to confine himself to conversation. All 
branches of the conventional wisdom are equally agreed on the 
undesirability of remedies that are effective. 


There are several reasons for this barren position. First, to be sure, some 
reap material benefit from inflation. They too oppose it, for reasons of 
respectability, but their opposition is less than impassioned. Of importance 
also is the influence of inaction—or postponement—as a policy. This does 
not reflect mere negativism, as is often supposed and even more frequently 
charged. As earlier noted, in the nineteenth-century model of the 
competitive society, a rhythmic sequence of expansion and contraction in 
economic activity was assumed. The expansion was accompanied by rising 


prices; in the contracting phase, these gave way to falling prices. The 
movements in either direction were thought to be self-limiting. Thus if 
prices were rising, one had only to wait. Presently they would reverse 
themselves and begin to fall. 

In the course of time, confidence in the self-limiting character of these 
movements was seriously weakened. This was especially true as regards 
the period of contraction or depression, and the great depression dealt a 
decisive blow. Although as late as the early thirties it was a tenet of the 
conventional wisdom that in depressions the appropriate course of action 
was a severe "hands-off policy, government intervention against 
depression came eventually to be regarded as inevitable. 

However, there was never any equally dramatic assault on the older 
confidence that rising prices and inflation would cure themselves. Keynes 
led the attack on the conviction that depressions were self-correcting by 
picturing the possibility, indeed the probability, that the economy would 
find its equilibrium with an unspecified amount of unemployment. 
Scholars seized his point and sought to persuade the politicians and the 
public. The notion that, in peacetime, prices might as a normal thing rise 
continuously and persistently has had no Keynes. 

Thus the conviction, or more precisely the hope, has remained that 
peacetime inflation might somehow be self-correcting. This is not a hope 
in which even conservatives repose very great confidence. But in 
combination with the belief, so common in recent years, that the behavior 
of the economic system is bound to be favorable if only earnest and God¬ 
fearing men are in command of its destinies, it provides a strong reason for 
always waiting to see if prices wouldn't turn down by themselves. Even 
liberals, who are required to advocate although not to specify action to 
prevent inflation, are in practice tempted to wait and see. 

This disposition to inaction is reinforced by the belief, powerful ever 
since the thirties, that the most grievous threat to the American economy is 
a depression. If this danger lurks, however obscurely, around the corner, 
then there is all the less reason to act to control inflation. For inflation may 
any day come to an end in the thunder of economic collapse or the lesser 
misery of a few million unemployed. These eventualities are much more 
grave than rising prices. We are especially hesitant, knowingly at least, to 
invoke measures which might precipitate them. Some inflation remedies 
might do so or, at any rate, be blamed. 


However, the forces which act to make inflation a peculiarly 
unmanageable problem in our time are imbedded much more deeply in the 
fabric of our social life. We are impelled, for reasons of economic security, 
to operate the economy at a level of output where it is not stable—where 
persistent advances in prices are not only probable but normal. The 
remedies that would be effective collide with the urgencies of production 
for purposes of economic security. Or they are in conflict with attitudes 
which emphasize the importance of economic growth and of unhampered 
markets for the efficient use of resources. This conflict has been further 
complicated by what is in part a belief, in part a hope, and in part a faith 
that the conflict can be evaded. A principal means to this evasion is the 
manipulation of the monetary supply—what economists have come to call 
monetary policy. 

We shall look first at the nature of inflation and its consequences and 
then, in the next chapter, at the hope, never so strong as in recent times, 
that the conflicts which it presents might somehow be elided by monetary 
policy. Then we shall examine the unresolved conflict between the other 
remedies and the store we set by economic security and also by economic 
growth and unhampered markets. 


Understanding of the problem of the modern inflation- begins with a basic 
distinction between two parts of the economy and the differences in price 
behavior therein. In that part of the economy where, as with agriculture, 
there are many producers and an approach to what economists term pure 
competition, no individual seller controls or influences prices. There prices 
will move up automatically in response to increased demand. In the typical 
industrial market—steel, machinery, automobiles, most nonferrous metals, 
chemicals—a relatively small number of large firms enjoy, in one way or 
another, a considerable discretion in setting prices. In these markets—the 
ones characterized by what economists call oligopoly—as capacity 
operation is approached, it becomes possible to mark up prices. The word 
approached is emphasized. The possibility exists before capacity operation 
is reached. The fact that all firms are nearing capacity is assurance that no 
firm, by holding back, will capture an increased share of the market. It 
cannot supply it. Nor, under these circumstances, is there danger that there 


will be extra stocks lurking around at a lower price. 

At this point, it is necessary to foreclose on what is perhaps the 
commonest error in contemporary attitudes toward inflation, although the 
point is well understood by economists. This is the almost inevitable 
temptation to regard increased production as a remedy for inflation. It is 
the most natural of errors; the first thoughts on the matter are wonderfully 
simple and forthright. If inflation is caused by output pressing generally on 
capacity, then one need only get more capacity and more output and thus 
ensure that this tension no longer exists. But as just a moment's further 
thought will suggest, additional all-round production, even when it can be 
readily obtained from existing capacity, will pay out, in wages and other 
costs, the income by which it is bought. We have seen, moreover, that 
wants do not have an origin that is independent of production. They are 
nurtured by the same process by which production is increased. 
Accordingly, the effect of increased production from existing plant 
capacity is to increase also the purchasing power to buy that production 
and the desires which ensure that the purchasing power will be used. 

But there is worse to come. If production is nearing capacity, a 
considerably increased output will require an increase in capacity. The 
increased investment that this implies will, in the form of wages, payments 
for materials, returns to capital and profits, add to purchasing power and 
the current demand for goods. It does so before the added capacity 
resulting from the investment is in place to meet the demand. Thus the 
effort to increase production adds to the pressure on current capacity—and 
to the prospect for inflationary price increases. 

A cat chasing its own tail may, by an extraordinary act of feline 
dexterity, succeed on occasion in catching it. To overcome inflation by 
increasing production, while superficially similar, will not so often be 


The response of the economy, when it is operating near capacity, to an 
increase in demand will not be uniform for all industries. As just observed, 
in the competitive industries, i.e., those where prices are set impersonally 
by the market, any increase in demand when supply can no longer be 
readily expanded will, predictably, raise prices. Similarly, a reduction in 


demand will reduce prices. However, in the characteristic industrial market 
—those of oligopoly and administered prices—the effect of the increase in 
demand must be implemented by a specific decision by the firm to change 
its price. This decision may, on occasion, be delayed and for a variety of 
reasons: inertia; the need to establish a consensus on the extent of the 
increase under circumstances where the antitrust laws forbid formal 
communication between firms; the fear of a durably adverse public 
reaction to the advance; the fear that, over a longer span of time, the price 
increases will be damaging to the competitive position of the firm or 
industry; and the possibility of attracting the attention of the union and 
stimulating wage demands all may lead to delay. (It is worth repeating that 
this kind of price behavior can occur only in that part of the economy 
where producers are sufficiently few and are otherwise so situated as to 
have power over their own prices. Such behavior is not vouchsafed to the 
farmer or to the businessman who is one of many in the market.) For many 
of the same reasons, price increases, when they occur, will not bring prices 
to the point where they maximize the short-run or current returns of the 
company. It is in the long run that the corporation lives. If the prices that 
maximize profits at the moment will bring wage demands that will 
threaten the cost position of the company over time; or if there promises to 
be long-run damage to the competitive position of the company; or if the 
public reputation will be hurt, then short-run maximization of return does 
not accord with self-interest even when this is defined in the narrowest of 
pecuniary terms.- The firm will not proceed to maximize its current return 
unless something happens—an important point—to make this possible 
without damaging the longer-run interest. 

Two things follow. In a period of high and rising demand, short-run 
possibilities for increasing prices are likely to run ahead of the long-run 
assessment of where prices should be. Therefore, firms in the typical 
industrial market are likely to have what amounts to a reserve of 
unliquidated gains from unmade price advances. Unlike the farmer or 
other competitive producer, who is effectively isolated from any such 
opportunity, firms in these markets could exact higher prices than they do. 
They will do so if circumstances so change as to make short-run 
maximization more nearly consistent with the firm's view of its long-run 

As a result, price increases in these industries are not tied tightly to 
capacity operations or, as in competitive industries, to rising demand. 


Demand in, say, the steel industry may fall to something less than capacity 
levels, but if there is an unliquidated gain, and something alters the relation 
between short- and long-run maximization so as to make the former more 
feasible, prices will still be increased. As just stated, this can happen when 
demand is falling. Indeed, falling profits may make price increases 
inevitable. In the competitive industries, output being given, prices will 
never go up except by reason of an increase in demand. When demand 
falls, prices predictably will fall.- 

While prices in the administered-price industries may rise in face of 
some excess capacity and fall in face of falling demand, the scope for such 
movements should not be exaggerated. Excess capacity, if it is 
considerable, will increase the danger that some firm will fail to go along 
or, at a later date, resort to surreptitious price-cutting. These dangers will 
act to enhance the doubts about the wisdom of raising prices to maximize 
short-run gains and increase the reluctance to do so. There will be similar 
and perhaps stronger fear of the longer-run consequences of such price 
increases when demand is falling. The action may have to be reversed. 
Perhaps meanwhile wages will have moved up partly because of the price 
increase. The important point is only that in industries characterized by 
oligopoly, the relation between demand, capacity and price has a degree of 
play. Prices are not restricted immediately when demand is curbed or 
excess capacity appears. 


In the inflation drama, it remains only to introduce Hamlet. That, by 
common consent, is the union. It is the instigator presumptive of that most 
familiar of economic phenomena, the wage-price spiral. 

The role of wages in relation to inflation has long been a troublesome 
matter for economists. Obviously wages, through marginal cost effects, 
have something to do with price increases. Yet a firm that advances its 
prices after a wage increase could have done so before. At the previous 
lower costs and the higher prices, it would have made more money. The 
wage increase did nothing to enable it to get the higher price. An advance 
in steel wages adds only infinitesimally to the demand for steel mill 
products and only after a time. In any event, this is not something which 
steel firms take into consideration in their typically prompt response to a 

wage increase. - 

The explanation lies in the existence of the margin of unliquidated gain 
and in the further fact that the wage advance, of itself, promptly increases 
the opportunity for short-run maximization in relation to long-run 
maximization. This is most obviously the case when the firm has been 
unwilling to advance its prices because of fear that it would attract the 
attention of the union which would press for wage increases. Now the 
union's attention has manifestly been attracted, and there need no longer be 
any reluctance on this score. The danger of an adverse public reaction is 
also least at such times. The public will ordinarily attribute the advance in 
prices to the union. In steel and other industries, there is now a well- 
established policy of making the occasion of a wage increase the 
opportunity for a rather large increase in prices and company revenues. - 

This is the core of the relation of wages to prices but not quite all of it. 
It would be wrong to suggest that the initiative to the whole movement lies 
with the wage demand of the unions. Living costs rise, eroding the last 
wage gains and stimulating efforts to recoup. And when demand and 
responding production are at capacity levels, profits will ordinarily be 
good. These in turn act as the lodestone to union demands. In the 
appropriate industries, the unexploited opportunity for price increases can 
now be seized. So it goes. One cannot single out a particular spoke in a 
wheel, paint it black (or red) and say that it shoves all the others. However, 
this does not prevent the effort. Its futility as a subject of social 
controversy notwithstanding, few subjects are more debated than the 
relative responsibility of workers and employers for the price advances 
which inflation comprises. 


Price movements work themselves through the economy with a highly 
diverse effect on different groups. Where firms are strong in their markets 
and unions are effective, no one is much hurt, if at all, by inflation. 
Concern over the problem will be marked by the fortitude with which we 
all are able to contemplate the sorrows of others. Elsewhere, the effect will 
be highly mixed. Those individuals and groups will suffer most which 
have least control over their prices or wages and hence the least capacity to 
protect themselves by increasing their own return. Or if such control, as in 


the case of agriculture, is slight, then the effect will depend on whether the 
income elasticity of the demand for the particular product—roughly the 
effect of increased incomes on the demand for the product—is small or 
great. And something will depend also on whether the particular producer's 
costs are affected promptly or belatedly by the increase in prices. 

Thus, by way of illustration, farmers have little or no control over the 
prices at which they sell their products. Inflation reaches them by way of 
impersonal market movements. For the wheat or potato farmer, the income 
elasticity is very low—as wage incomes rise, individuals spend no more 
for bread or potatoes and, on occasion, spend less. Meanwhile, the farmer's 
costs of fuel, fertilizer and other factors from the oligopolistic sector of the 
economy will have risen. For the beef-cattle producer, by contrast, income 
elasticity is rather higher. He is the beneficiary of the well-known and 
statistically quite demonstrable tendency of people who have an increase 
in pay to celebrate with red meat. Other things being equal, and in the 
cattle business they frequently are not, his position will be happier than 
that of the producer of bread grains or potatoes. 

Such discrimination is pervasive. The individual or firm which, either 
in line of business or as the result of speculative acumen, holds large 
unhedged inventories, benefits from the increased demand for these and 
from the consequent increase in price. 

At the other extreme are those who experience the rising costs but 
whose own prices remain largely unaffected because they are fixed by law 
or custom or, at a minimum, by someone else. This is the position, during 
inflation, of the teacher, preacher and other of the white-collar community 
and of those who are reaping the reward of past services to society in the 
form of pensions or other such payments. The result of rising costs and 
comparatively fixed returns for all of these groups is much too familiar to 
require exegesis. Those on pensions suffer severely. Those who depend for 
their pay on the public treasury, especially of state and local governments, 
are also likely to suffer during inflation. Like all others, they experience 
the increase in prices. Their income is likely to lag. This lag is of 
considerable social consequence, and it is something to which this essay 
will return. 

Not all vendors of professional services do suffer. Occasional groups 
have discretion over their prices and are able to take prompt advantage of 
the general increase in money wages and demand, to raise their own 


charges and revenues. Lawyers and doctors normally fall in such a 
category. There have been others. In the early days of World War II, a 
grateful and very anxious citizenry rewarded its soldiers, sailors and 
airmen with a substantial increase in pay. In the teeming city of Honolulu, 
in prompt response to this advance in wage income, the prostitutes raised 
the prices of their services. This was at a time when, if anything, increased 
volume was causing a reduction in their average unit costs. However, in 
this instance, the high military authorities, deeply angered by what they 
deemed improper, immoral and indecent profiteering, ordered a return to 
the previous scale. - 

In a free market, in an age of endemic inflation, it is unquestionably 
more rewarding, in purely pecuniary terms, to be a speculator or a 
prostitute than a teacher, preacher or policeman. Such is what conventional 
wisdom calls the structure of incentives. 


In basic outline, the requirements for inflation control will now be clear. 
When the economy is at or near capacity, firms in the concentrated sector 
can advance their prices and will have inducement from advancing wages 
to do so. Such price increases, with their further effects, will be prevented 
only if there is slack in the economy. Then various restraints begin to 
operate on the price advances, on the firms in granting wage advances, and 
on unions in asking for them. But, since firms may have unliquidated gains 
when operating at rather less than capacity, this slack in the absence of 
other measures may have to be considerable. 

In the past, there has been much argument whether, in the strategy of 
inflation control, one should seek to come to grips with the level of 
demand (in relation to the capacity of the economy and the labor force) or 
whether one should seek to deal with the wage-price spiral. Economists 
have generally emphasized the importance of the level of demand; to the 
layman, the wage-price spiral has always seemed the phenomenon that 
most obviously required attention. The proper answer, it will be seen, is 
that both are important. Inflation can be controlled by a sufficiently heavy 
reduction in the level of demand. It can be controlled with a less drastic 
reduction if something could be done to arrest the interaction of wages and 
prices or, to speak more precisely, of wages, profits and prices. 


The conflicts here will be evident. The introduction of slack, especially 
if it must be considerable, is in conflict with the imperatives of economic 
well-being—production. And the use of controls is in conflict with the 
ancient conviction that resources must be allocated efficiently among their 
various employments and that the free market is the most efficient and 
possibly even the only satisfactory instrument of such allocation. Setting 
the store that we do by the production of goods, we have here a seemingly 
decisive argument against the use of controls. 

We shall have occasion to examine this conflict more closely chapter 
after next. But first it is necessary to look at the effort to avoid the conflict 
entirely by use of monetary policy. 


15. The Monetary Illusion 

in Britain throughout the nineteenth century, the Bank of England was 
able through the increase or decrease of the bank rate—in principle, the 
rate of interest at which it stood ready to lend money to those who in turn 
were in the business of lending money—to have a measure of influence on 
the British banking and business life. The circumstances were undoubtedly 
favorable. The world was mostly at peace. There were no restraints on the 
international movement of capital funds; these were free to move 
anywhere in pursuit of a higher return. An increase in the rate would bring 
funds from abroad to take advantage of the higher earnings. A reduction 
would bring borrowers instead. Thus the volume of bank reserves could be 
influenced with some precision. The British economy in the last half of the 
century was exposed by free trade to the competition of the rest of the 
world. One can assume, as a result, that it was fairly sensitive to higher 
interest costs, which meant higher carrying charges for new investment, or 
to lower interest costs, which bespoke a favorable opportunity for 
expansion. There is much room for debate on the extent of the effect of the 
bank rate on the British economy—how much investment was encouraged 
or discouraged and to what extent prices were inflated or deflated. Perhaps 
the bank rate was credited with much that would have happened anyway. 
Perhaps it derived prestige from its position as a Victorian conversation 
piece. But perhaps it was of consequence. 

What is not in question is that the possibility of exercising control over 
the economy by such means came to have a compelling charm for all who 
were in any way identified with it. This was especially true of the banking 
community. For it meant that bankers, through the central bank, stood at 
the apex of economic influence. Their power, moreover, was not won by 
the crude, uncouth and uncertain process of soliciting votes. It was the 
direct reward of financial achievement and wealth. Not only did monetary 
policy belong to the banking community, but specific steps were taken to 
safeguard the exercise of this authority from the intervention or 
intercession of politicians. The central bank was kept "independent" of the 
government and in degree above it. Such was the case for two centuries 
with the Bank of England. It is still so, nominally, of the Federal Reserve 
System in the United States. This independence, though extensively 
celebrated in the conventional wisdom, would not long sustain determined 
opposition to the wishes of the American Executive and the Congress. But 


it reflects, in at least vestigial form, the belief that monetary policy is the 
highly professional prerogative of the financial community. As such, it 
must be protected from the crude pressures of democratic government. 

The management of the economy by monetary methods involved the 
exercise of subtle, as distinct from naked, power. No businessman, or 
indeed no citizen, was told what to do. Instead, they were guided by forces 
of which they were themselves not wholly aware. If the economy must be 
given guidance, how gratifying that it be done in this discreet and seemly 

Moreover, to most people money and credit, the way they are 
conceived and extinguished, and the fact that pieces of paper of little 
intrinsic worth can be so valuable, remain a great reservoir of mystery. 
Decisions on monetary policy had always been taken in camera and 
communicated to the public only by specific actions—movements in the 
interest rate or increases or decreases in central-bank portfolios. A learned 
literature developed which was privy to the mystery and which speculated 
on the motives behind various moves. Its authors came to have a stake in 
the policy they interpreted. They belonged to a select few who understood. 
Outshining them only were those who were privy and really knew. Such 
was the charm of this policy that this affection was easily translated into 
claims for its effectiveness which, in fact, did invade the supernatural. 
Monetary policy was graced by effects not only mysterious but magical. 

This has not invariably been so. In the nineteen-thirties, the prestige of 
monetary policy was, for a time, very low. The Federal Reserve System, 
deeply uncertain in its purpose, had failed to arrest the speculative boom of 
the late twenties; low interest rates and easy money were equally 
ineffective in dealing with the great depression. Bankers, in these years, as 
a result of error, unhappy accident and the enthusiastic denigration of left- 
wing critics, had suffered a severe decline in popular esteem. Down with 
them went the faith in monetary policy. Keynes argued that the rate of 
interest was a roundabout way of influencing economic activity and of 
small practical utility. 

From this nadir, monetary policy had a great revival in the years 
following World War II. Banks and bankers recovered their prestige and 
so did the instrument with which they were so intimately identified. Faith 
in monetary policy became a badge of resistance to the heresies of Keynes 
and proof that the individual had no part in the radicalism which sought to 


defame decent and respectable men because they were in the business of 
holding and lending money. 

More important, something had to be done about inflation. The other 
measures for contending with this ineluctable phenomenon were under the 
handicap of being unpalatable, impractical or even, like price controls, 
incipiently un-American. This was the consequence of their being in 
conflict with other economic goals. Yet something had to be done. 
Monetary policy remained the only hope. To the affection which the policy 
elicited and the faith on which it was grounded was added a larger element 
of wishful thinking. There was nothing else, so it had to work. Monetary 
policy became a form of economic escapism. Without it, the realities 
would indeed be hard. 

Unhappily, faith or urgent need is not an assurance of practical 
performance. Even if, as bankers have anciently suspected, doubts about 
monetary policy have on occasion been the invidious reflection of doubts 
about bankers, this still does not ensure that monetary policy will work. As 
Chapter 2 has shown, the ultimate enemy of the conventional wisdom is 
circumstance. It is never in such peril as when enthusiastic exponents put it 
to a practical test. Monetary policy, despite its unparalleled position in the 
conventional wisdom, makes only secondary contact with the problem of 
inflation. And it has had the misfortune to be subject to extended 


First of all, monetary policy suffers from the unfortunate absence of any 
occult effect. It has long been clear that economic management, especially 
in the United States, would be greatly facilitated if resort could 
occasionally be had to witchcraft. Monetary policy, by far the most 
promising possibility, involves none. This every good citizen must regret. 

More somberly, the policy makes no direct contact with the wage-price 
interaction. This not even its prophets suggest. Of diminished importance, 
as suggested, it was once very relevant. Accordingly, monetary policy 
must work, if at all, by reducing the aggregate demand for goods. Its 
handle for accomplishing this is a higher interest rate and a diminished 
supply of funds for lending. By thus discouraging lending by banks and 
borrowing by consumers and producers, the policy is presumed to restrict 


or restrain what the latter have to spend. The reduction in this spending, if 
it occurs, will then have secondary (or multiplier) effects on the spending 
of others. The ultimate consequence is to reduce the demand for goods as a 
whole or to restrain the rate of increase in demand.- By thus keeping 
demand from pressing on capacity and on the labor force, prices are kept 
stable. Or such must be the hope. 

That is the only avenue of effect.* An alternative form of exposition 
emphasizes the effect of this policy on the supply of money. But so far as 
this argument does not escape into mysticism, it comes to the same thing. 
The money supply increases or decreases as the result of increases or 
decreases in commercial bank lending. An increase in the money supply 
affects prices by way of the increased spending of borrowers from 
borrowed funds as well as through the multiplier by those from whom they 
buy. When one restricts the money supply, one restricts the spending 
associated with the lending and borrowing of funds. The measures are the 
same: the supply of funds available for lending is reduced, and the interest 
rate is raised to discourage borrowing. No matter how the cake is sliced, 
the policy, if it is to work, must restrain borrowing. And thereby it 
becomes effective by reducing or restraining the total volume of spending. 
So far, there is little disagreement among economists. 

As just noted, direct spending from borrowed funds is of two kinds— 
by consumers for consumer goods and by businessmen for investment. 
The advantage of looking at economic policy in the full context of 
economic attitudes and behavior will now be evident. To restrict consumer 
borrowing by increasing the interest cost on installment and other loans 
collides abruptly with the process of consumer-demand creation. If 
consumer wants were independently determined, an increase in interest 
charges could, conceivably, operate through the consumer's demand 
schedule to reduce borrowing and spending. It seems unlikely that the 
elasticity of the response would be great, but the possibility exists. But as 
matters now stand, any step to discourage borrowing and buying will be 
automatically opposed by the machinery for consumer-demand creation. A 
shrinkage in consumer borrowing will be merely a warning to those 
concerned with the synthesis of consumer demand to increase their efforts. 
Or they can take steps to annul the effect of the increased interest charge. 

This is a matter of minimum difficulty. Consumer credit is ordinarily 
repaid in installments, and one of the mathematical tricks of this type of 


repayment is that a very large increase in interest rates brings a very small 
increase in the monthly payment. Thus a man who signs a note for $3800 
on the purchase of a new car (after trade-in) to be repaid over twenty-four 
months, and who agrees to an "add-on" of 9 percent of this amount as 
interest, will have a total interest bill of $684 and monthly payments of 
$187.- If the interest charge is increased by one-third to an add-on of 12 
percent, his total interest obligation becomes $912, but the increase in 
monthly payments is only $9. The one-third increase in interest brings but 
a one-twentieth increase in the payment. This increase can easily be offset 
by a lengthening of the term of repayment, a common practice in the high- 
interest-rate period of the late nineteen-sixties and early seventies. In 
practice, it is submerged by a variety of additional inspection, insurance 
and other charges. Since the customer, in contemplating the purchase, is 
less aware of the interest rate than of the monthly charge, it will be seen 
how readily a very large increase in interest charges can, in practice, be 
offset. During periods of active monetary policy, increased finance charges 
have regularly been followed by large increases in consumer loans. Want 
creation, and the process of financing it, were still acting to exaggerate 
rather than to restrain the inflationary effect of consumer spending. 

There is no chance that monetary policy can have even a min imal 
effect on consumer spending while its conflict with the machinery of 
consumer-want creation remains unresolved and, in degree, even 
unrecognized, and while we concede the paramount importance of the 
latter. And though the reasons have not been fully seen, there is, in fact, 
considerable agreement that monetary policy does not make any effective 
contact with consumer borrowing and spending. 


That the restriction of business investment by monetary policy involves a 
similar conflict with a prior goal will now be apparent to everyone. We set 
primary store by production. Monetary policy seeks to prevent price 
increases by cutting down on the investment by which productive growth 
is made possible and is sustained. It would be hard to imagine a more 
abrupt collision with the dominant position of production. Oddly enough, 
those who set the greatest store by monetary policy—bankers and 
businessmen—are often those who are most inclined to emphasize the 
importance of production and to view increases in output with the most 



In practice, the conflict between monetary policy and production is not 
so severe. This is partly because of a surviving belief that monetary policy 
somehow makes contact with the price level without affecting the volume 
of investment. It is not unknown for men of sound faith to call for a high 
and rising volume of business investment and incentives, including tax 
revision, to encourage it, while at the same time they strongly endorse a 
policy of monetary restraint designed to prevent inflation. These 
remarkably contradictory positions can be reconciled only if there is faith 
that, by essentially occult means, monetary policy will stabilize prices 
without affecting the volume of producer borrowing, investment and 

The conflict between production and a monetary policy designed to 
decrease business investment is also eased by our tendency, described in 
Chapter 9, to accept and even to applaud whatever rate of economic 
growth we are currently enjoying. Concern for such growth is rhetorical 
rather than real. Hence, we are not notably disturbed by a policy which, by 
reducing the volume of new investment, seeks to lower the rate of 
economic growth so long as serious unemployment does not appear. 

However, if individual firms were prevented by the policy from 
making the investment which seemed to them wise and profitable, there 
would, of course, be objection. And this brings us to the final reason why 
the conflict rarely reaches the acute stage. 


In times of high or near-capacity production, the context in which the 
danger of inflation is thought to become acute, profits and profits prospects 
are certain to be favorable. Because production is near capacity, 
investment in expansion will seem to the individual firm both 
advantageous and singularly logical from the point of view of the 
community. (The firm will be much more impressed by the visible service 
it renders in increasing the supply of its product than by the invisible effect 
of its investment in adding to total spending and thus to inflationary 
pressure.) For all of these reasons, most investment will be extremely 
unresponsive to moderate increases in the interest rate, which is the way in 
which monetary policy presents itself to the ordinary business firm. 

If the policy is applied severely, some firms will, indeed, be squeezed 
by the higher rates. And in practice, since interest rates are comparatively 
sticky, some rationing of credit will occur. Some firms which would like to 
borrow will be unable to do so. If the policy is pressed far enough, 
investment spending will be curtailed. In the end, the slack required for 
price stability would appear. So would the conflict with our attitudes on 
the importance of production. There would be an equally urgent conflict 
between this policy and the employment and associated economic security 
which is the counterpart of high production. But before this point is 
reached, another problem of even greater import arises. That is the effect 
of monetary policy on different kinds and sizes of firms. 

As we have seen, when demand has been growing and the economy is 
at or near capacity, firms in the oligopolistic sector are likely to have a 
reserve of unliquidated gains.- This enables them to pass higher interest 
charges along to the consumer. (If they can pass along wage increases, 
they can obviously do the same with interest.) And by raising prices and 
income, they can resort to unliquidated gains for investment purposes. The 
need to price for returns sufficient to cover a considerable share of 
investment requirements has been a stock defense of industrial price 
increases for many years. Thus industries which have unliquidated gains 
are able, in effect, to contract out from the effect of monetary policy. The 
attractiveness of the large firm as a bank customer and its ability to go 
directly to the market for funds also help exempt it from the effects of the 
policy. In the rationing that follows, it is the small firm that finds itself 
unable to borrow. 

Firms in competitive markets—those whose prices and costs are 
impersonally determined by the market for all—obviously cannot pass 
higher interest costs ahead to the customer. In the relevant short run, they 
cannot raise the prices that they do not control to get investment funds 
from their customers. As a rule, being small they cannot circumvent the 
rationing of bank credit by selling securities in the market. Hence, for 
competitive industries—farmers, small builders, small retailers, service 
industries, dealers—monetary policy is effective. And it will be effective 
for these firms much before it affects the industries in which there is a 
greater measure of market control.- 

It will be easy to see why monetary policy is regarded with equanimity 
and even approval by larger and stronger firms. Unless applied with 


severity over time, it does not appreciably affect them. But, for the same 
reason, there must be grievous doubts about the workability of the policy. 
Before the large-volume investment spending of the larger and more 
powerful firms is affected, a severe squeeze will ordinarily be placed on 
the capital requirements of small-scale firms. For such firms, the conflict 
between monetary policy and productive growth can be highly visible and, 
indeed, very painful. 


As noted, the most mercurial source of spending in the economy has long 
been recognized to be that for business investment. Spending by 
consumers and by governments have (consumer borrowing apart) 
substantial elements of reliability. They are related to income being 
received. They are grounded on customary patterns of behavior. In the 
case of government outlays, they have a markedly greater constancy than 
the revenues which support them. Investment spending, by contrast, 
depends on an estimate of future returns. The singular feature of the future 
is that it cannot be known. Estimates as to what it holds will change. So, 
accordingly, will investment outlays. And the changes in these latter, by 
changing prospective earnings, change the future itself. 

If monetary restraint is exercised over a period of time, it may 
eventually affect the investment of larger firms. This may come about in a 
variety of ways but most obviously because the curtailment of the 
borrowing and investment of weaker firms and industries will, in the end, 
affect demand and investment prospects for the more concentrated sector 
of the economy. When this happens, there will be a revision of investment 
plans, and this could be large. 

Monetary policy thus operates on the most mercurial dimension of 
economic activity. This is the final source of inutility and it may, indeed, 
be a source of considerable danger. If, the conflict with production 
notwithstanding, it is applied with rigor and persistence to produce the 
requisite slack, there is danger that it will do too much. Or, to speak more 
precisely, there is unavoidable uncertainty as to just what it will do. It 
seeks to influence the most unpredictable element of aggregate demand. 
The result of this influence is, accordingly, unpredictable. There must 
always be danger that monetary policy will reduce investment to the point 


of causing a serious depression. Such a depression would not be 
incorrectible. But neither would it be desirable. And it can and would 
indeed occur well before prices were stabilized.- 


The thrust of this chapter, it will be evident, is highly negative. There is no 
magic in the monetary system, however brilliantly or esoterically 
administered, which can reconcile price stability with the imperatives of 
production and employment as they are regarded in the affluent society. 
On the contrary, monetary policy is a blunt, unreliable, discriminatory and 
somewhat dangerous instrument of economic control. It survives in esteem 
partly because so few understand it, including so few of those—builders, 
smaller businessmen who must finance inventories, farmers—on whom it 
places the prime burden of its restraint. It survives, also, because an active 
monetary policy means that, at times, interest rates will be high—a 
circumstance that is far from disagreeable for those with money to lend. - 


16. Production and Price Stability 

in the political spectrum of modern economic policy, monetary 
measures are the instmment of conservatives. The weapon of liberals is 
fiscal policy. And among economists generally, fiscal policy is regarded as 
the ultimate economic weapon. The friends of monetary policy aver its 
effectiveness, perhaps partly to allay their unconscious doubts. The 
effectiveness of fiscal policy is much more rarely debated. Moreover, it 
had the implicit blessing of Keynes. As the converse of the public 
spending which was the Keynesian remedy for unemployment, it has still a 
slight cachet of rational radicalism. 

Fiscal policy is much simpler and more forthright in its operation than 
monetary policy. The mysticism has been exorcised, and the theoretical 
chain which links the original action and the ultimate effect, something 
always to be watched in economics, is far shorter and involves far fewer 
asseverations as to what should happen. The government taxes more than 
it spends. This difference is not spent. Hence, it is a net reduction in the 
spending of the country as a whole. If this difference is sufficiently 
increased, then total spending in the economy will no longer press on the 
capacity of the economy. Slack will result. If this slack is large enough, 
firms will hesitate to raise prices—in terms of the present analysis, short- 
run maximization will seem inconsistent with longer-run return—and 
wage demands will be resisted. Demand will not pull up prices in the 
competitive sector. Prices, as a result, will be stable unless, indeed, the 
process is pressed too far, in which case they will fall. 

Business firms feel the impact of monetary policy initially in the form 
of a change in factor cost or availability—specifically, in the cost or 
availability of credit for capital. Large firms and those with substantial 
market power are able, as we have seen, to pass this cost increase along to 
customers, and in case of a shortage of credit, they can have recourse to 
alternative sources of supply. Competitive and smaller firms have no 
similar escape. Fiscal policy works, in the main, by reducing demand. This 
reduction affects the demand for the products of all firms, large and small, 
strong and weak. No firm, in the technical idiom, can contract out of the 
movement in its demand curve. The effect of the policy will not be 
precisely the same as between competitive and oligopolistic markets and 
as between large firms and small but it is much more nearly equal. - 


Yet in the years since World War II in the United States, fiscal policy 
has also revealed itself as a very poor defense against inflation. The reason 
was not that it failed to work but that not even its principal proponents 
argued for its vigorous use. It was favored in principle but not in practice. 
The explanation is simple. Here is another unresolved conflict in economic 
goals. Once again the advantage of seeing things in full social context will 
be plain. 


For reasons that will be explored in detail in the next chapter, civilian 
government spending is likely at any given time to be near the minimum 
which the community regards as tolerable. Complaint about waste and 
inefficiency in performing these services, which is endemic in our political 
comment and often with some foundation, should not be allowed to 
confuse the issue. Very important functions can be performed very 
wastefully and often are. And waste can rarely be eliminated by reducing 
expenditure. It is far easier to cut the function than the waste, and this is 
what occurs. In time of inflation, the economic context of which we are 
speaking, the situation of the public services is certain to be even more 
tenuous because of the inevitable tendency for public budgets to lag 
behind the general increase in prices. 

This means that a positive fiscal policy to counter inflation will almost 
always require an increase in taxes. The importance of cutting or 
postponing expenditures, however much it may be urged on the more 
vacuous margins of the conventional wisdom, may on occasion sustain 
hope. But the actual accomplishment will invariably be negligible. On this 
point, experience is complete. Whenever inflation is a danger (and now 
and then when it is not), spokesmen urge the administration and the 
Congress, and the latter urge upon themselves, sometimes with seeming 
seriousness, the importance of cutting expenditures. Nothing is ever 
accomplished of sufficient magnitude to affect appreciably the total 
spending of the economy. Quite often nothing is accomplished. And 
indeed the expectations of nonaccomplishment are such that the 
Congressional discussion of budget-cutting each winter has now assumed 
the innocent aspect of a folk rite. It begins as the budget time approaches. 
It reaches full pitch a few days after the budget is submitted. The gods are 
appeased by stern denunciations of public profligacy and inspired 


promises of vast economies. The ceremony is solemnly described to the 
people by press and television. Thereafter, the seemingly indispensable 
outlays are voted, and the result is almost invariably to increase the budget. 

To raise taxes to reduce demand encounters at the outset a problem of 
understanding. That, in the event of insufficient demand and depression, 
taxes should be cut and public outlays increased in order to increase 
aggregate demand and employment is now widely accepted. There is an 
inherent logic to the procedure. This is also true of cutting public 
expenditures to counter inflation—were this only possible. However, the 
logic of increasing taxes is by no means so evident. A first and obvious 
effect is to increase the consumer's living costs or reduce his income. This 
happens at a time when inflation is making it difficult for many people to 
maintain accustomed living standards. Other taxes add to the producer's 
costs. Thus to attack inflation by raising taxes seems at first glance a 
curiously backhanded procedure. It is strongly resisted by the very 
considerable number of plain men who insist, never without fervor and 
pride, that subtlety in economic relationships is an indication of error and 
that truth is revealed only to the uncomplicated mind. - 


However, the most serious problem of fiscal policy is the conflict with 
other economic goals. 

It collides, first of all, with the tacit truce outlined in Chapter 7 on 
income inequality. Taxes are the device by which governments have most 
nakedly sought to influence income distribution. As a result, they have a 
considerable practical and an even deeper symbolic importance in relation 
to this issue. Hence, a proposal to increase taxes for fiscal reasons 
automatically provokes a debate on the question of inequality. Liberals, 
who hitherto had been abiding comfortably by the terms of the truce, are 
required by their faith to rally to the support of taxes which reduce 
inequality. Conservatives rally to oppose them. In wartime, this debate can 
to some extent be evaded by invoking the doctrine of equality and sacrifice 
—the rich man can be told that his sufferings at the hands of the tax 
authorities are roughly the counterpart of those of the soldier under 
shellfire. Despite much concentrated thought, no entirely suitable reply has 
ever been devised by those of means. Thus, in wartime, it has been 


practical to employ the income tax to absorb excess purchasing power. In 
peacetime, such use of taxation will at a minimum be complicated by some 
argument over the essentially unrelated issue of equality. 

Finally, there is the now classic conflict with production. Fiscal policy 
becomes effective only as the reduced demand brings output below the 
current capacity of plant and the labor force. Having persuaded ourselves 
that production is of paramount importance, we must now persuade 
ourselves to sacrifice it in return for price stability. Moreover, once again 
the sacrifice may have to be considerable. Where concerns are strongly 
organized in their markets and deal with effective unions, i.e., where the 
likelihood of unliquidated gains is great, the slack required, as already 
noted, may have to be quite large. Even though, in fact, the output is not of 
high urgency, the income to those whom the slack makes unemployed is of 
utmost interest and importance. 

Unlike monetary policy, fiscal policy makes its initial contact with the 
economy not by reducing investment expenditure but by reducing (in the 
main) consumer expenditure. In not attacking investment, it is thus, at first 
glance, less inimical to economic expansion or growth. However, too 
much should not be made of this distinction. Firms are encouraged to 
invest at least partly because production is pressing on capacity. When it 
ceases to do so—when there is slack—they can be expected to cut back on 
investment. Just as demand will have an acceleration effect on investment, 
to use the term familiar to economists, as production approaches capacity 
and the latter is enlarged, so it will have a decelerating effect as production 
drops away from capacity levels. So magnified, the movement in 
investment and therewith in total demand would appear offhand to 
reinforce the effect of fiscal policy. It gives a leverage to the change in 
spending that is brought about by government action. But it also means 
that once the economy ceases to be at capacity, there is a substantial 
sacrifice in investment for growth. Or, to put the matter differently, growth 
will be at a maximum only when the economic system is under that 
pressure to use the capacity which helps produce inflation. 

Were the economy given to occasional bouts of stimulation with 
excessive investment and rising prices—the business cycle of the central 
economic tradition—then countercyclical repression of demand might 
involve no serious problem. Some who have seen no conflict between 
fiscal policy and growth have, without doubt, viewed it in such a context. 


But if full employment and full use of capacity is taken as the norm of 
economic policy, as in modern times it is, then the rate of investment 
associated with full use of capacity is also normal. A policy which holds 
production below capacity in the interest of price stability inescapably 
sacrifices economic growth. 


So long as the use of fiscal policy is in unresolved conflict with other and 
prior economic goals, it will not be used with effective vigor, at least in 
peacetime. This conflict and the resulting inutility of fiscal measures are 
not yet widely conceded by economists. The textbooks still elucidate the 
use of fiscal measures as a device for ensuring price stability. They 
concede that we must settle for something less than completely full 
employment and that this will offer difficulties. But they assume that, 
given inflation, taxes can be increased. The only difficulty is that the 
policy never looks practical at any particular moment. While the conflict 
with other goals persists, it never will. 

One last possibility remains. That is to combine fiscal policy with 
control over prices and wages. As a result, prices and wages are unable to 
respond to the price-increasing influences that develop as production 
approaches capacity. The controls rather than the slack serve to prevent 
price increases at capacity operations. Thus they reconcile capacity output 
(and also related growth) with price stability. It would not be necessary to 
enforce any substantial amount of idle capacity and unemployment. 

There is a general view that price and wage controls accomplish 
nothing of themselves—that they deal with symptoms rather than with 
causes. To use them is to juggle with the thermometer, not the furnace. If 
current demand is far in excess of the capacity of the economy, there is an 
important element of truth in this contention. The only recourse is to bring 
demand into balance with supply. Anything else is an escape. But if, by 
fiscal or other measures, the aggregate of demand is kept about equal to 
the current capacity of the economy, then any such view of wage and price 
controls is a gross oversimplification. Wages act on prices and prices on 
wages as capacity is approached. Controls prevent this interplay, In doing 
so, they allow the economy to function closer to capacity without price 


Some economists have conceded this function explicitly; more have 
concurred implicitly by agreeing that such controls are necessary in a 
wartime emergency; i.e., when there is no escape from the need to 
reconcile full use of capacity with the greatest possible degree of price 
stability. But, on balance, the conventional wisdom still asserts the 
unwisdom of direct controls in peacetime. Nothing better establishes the 
good sense and soundness of an economist than a suitably solemn 
condemnation of such controls. 

The objections to controls are numerous. To be effective, it is assumed 
that they must apply comprehensively to all prices and all wages. This 
means that the administrative problems are indubitably grave and become 
more serious with passage of time. The specter of such control invokes the 
ancient resistance to the intrusions of government. This intrusion is indeed 
considerable, for the power to set prices is not insignificant in economic 
decision-making. To the extent that Social Darwinists and the utilitarian 
philosophers have successfully identified vitality and liberty with the free 
market, controls will be regarded as an even more far-reaching menace. 

Finally, and perhaps most important, such controls are sharply in 
conflict with stylized attitudes toward production. As Chapter 9 has 
shown, we set great store by the efficient allocation of resources as the 
device for maximizing production. That was the accepted formula for 
economic efficiency in the last century. Social nostalgia still accords it a 
central role. This allocation is accomplished in the capitalist society by the 
market—by the pull and push of market prices and market wages bringing 
labor, capital and materials to the firms and industries of most efficient 
use. Obviously one cannot have both controls and a free market which 
performs this function. 

None of the foregoing objections holds. In the war years, controls were 
consistent with a very large increase in output. That was because 
production was expanded along less stylized but far more effective 
dimensions than those related to improved resource allocation. Nor is it 
certain that the controls which would serve to arrest the wage-price spiral 
would have to be comprehensive. It is possible that very limited restraints 
will serve to reconcile capacity output and price stability. This is an 
important point to which this essay will return. The prices fixed by 
controls are already fixed by monopoly or oligopoly power. Here nothing 
decisive is changed. However, for the moment it is sufficient to note that 


price and wage control, as a way of reconciling price stability, maximum 
product and minimum unemployment, is in conflict, no less important if it 
is ostensible rather than real, with historic attitudes toward production. - 


A word of summary is now in order. We are impelled by present attitudes 
and goals to seek to operate the economy at capacity where, we have seen, 
inflation must be regarded not as an abnormal but as a normal prospect. 
The same attitudes which lead us to set store by capacity use of plant and 
labor force largely deny us the use of measures for preventing inflation. 
Monetary policy collides with the process of consumer-demand creation 
and, since it works on business investment, is in conflict with our emphasis 
on growth. It is also ineffectual, discriminatory and, possibly, dangerous. 
Fiscal policy is sharply at odds with the commitment to a level of output 
that ensures full employment and the accompanying economic security. 
Direct controls, which in theory might reconcile high employment with 
price stability, are under a heavy ideological cloud. We assume that we 
must have them in unworkable mass or not at all. They are in ostensible 
conflict with the goal of efficient production, for that has anciently been 
identified with market allocation of resources. 

These conflicts are partly obscured. The conservative disguises the 
conflict between monetary policy and production by his faith that this 
policy has occult or other transcendental effects not visible to the naked 
eye. The liberal, including the Keynesian economist, conceals the conflict 
between fiscal policy and production at full employment not so much by 
resort to mysticism as by a systematic refusal to face issues. This he 
accomplishes by keeping his advocacy of fiscal measures in general terms 
while being specifically critical of unemployment and underuse of plant. 
He commonly surrenders the opportunity for reconciling the conflict by 
agreeing that direct controls are unsound. 

Thus the way seems open to recurrent inflation. This, as Chapter 14 
has shown, has a highly discriminatory impact on different groups. And 
we shall see in the next chapter that there are deeper social consequences. 
Inflation strikes the economy at the point where it is most vulnerable to 


As this edition goes to press (in 1998), there have been changes 
bearing on what has just been said. The United States has seen some years 
of relatively low unemployment and very mild inflation, though no 
diminished fear thereof. The new situation reflects the declining power of 
unions and the growing importance of industries—consumer services, 
entertainment, the arts and professions and much advanced technology— 
where they are absent or unimportant. Here the wage/price interaction and 
spiral is not a factor. As often in economic life, change in controlling 
circumstances has brought appreciable economic change, how permanent 
one does not know. 


Y]. The Theory of Social Balance 

It is not till it is discovered that high individual incomes 
will not purchase the mass of mankind immunity from 
cholera, typhus, and ignorance, still less secure them the 
positive advantages of educational opportunity and 
economic security, that slowly and reluctantly, amid 
prophecies of moral degeneration and economic 
disaster, society begins to make collective provision for 
needs no ordinary individual, even if he works overtime 
all his life, can provide himself. 


the final problem of the productive society is what it produces. This 
manifests itself in an implacable tendency to provide an opulent supply of 
some things and a niggardly yield of others. This disparity carries to the 
point where it is a cause of social discomfort and social unhealth. The line 
which divides our area of wealth from our area of poverty is roughly that 
which divides privately produced and marketed goods and services from 
publicly rendered services. Our wealth in the first is not only in startling 
contrast with the meagemess of the latter, but our wealth in privately 
produced goods is, to a marked degree, the cause of crisis in the supply of 
public services. For we have failed to see the importance, indeed the 
urgent need, of maintaining a balance between the two. 

This disparity between our flow of private and public goods and 
services is no matter of subjective judgment. On the contrary, it is the 
source of the most extensive comment, which only stops short of the direct 
contrast being made here. In recent years, the papers of any major city— 
those of New York are an excellent example—tell daily of the shortages 
and shortcomings in the elementary municipal and metropolitan services. 
The schools are old and overcrowded. The police force is inadequate. The 
parks and playgrounds are insufficient. Streets and empty lots are filthy, 
and the sanitation staff is underequipped and in need of men. Access to the 
city by those who work there is uncertain and painful and becoming more 
so. Internal transportation is overcrowded, unhealthful and dirty. So is the 
air. Parking on the streets should be prohibited, but there is no space 
elsewhere. These deficiencies are not in new and novel services but in old 


and established ones. Cities have long swept their streets, helped their 
people move around, educated them, kept order, and provided horse rails 
for equipages which sought to pause. That their residents should have a 
nontoxic supply of air suggests no revolutionary dalliance with socialism. 

In most of the last many years, the discussion of this public poverty 
was matched by the stories of ever-increasing opulence in privately 
produced goods. The Gross Domestic Product was rising. So were retail 
sales. So was personal income. Labor productivity also advanced. The 
automobiles that could not be parked were being produced at an expanded 
rate. The children, though subject in the playgrounds to the affectionate 
interest of adults with odd tastes, and disposed to increasingly imaginative 
forms of delinquency, were admirably equipped with television sets. The 
care and refreshment of the mind was principally in the public domain. 
Schools, in consequence, were often severely overcrowded and usually 
under-provided, and the same was even more often true of the mental 

The contrast was and remains evident not alone to those who read. The 
family which takes its mauve and cerise, air-conditioned, power-steered 
and power-braked automobile out for a tour passes through cities that are 
badly paved, made hideous by litter, blighted buildings, billboards and 
posts for wires that should long since have been put underground. They 
pass on into a countryside that has been rendered largely invisible by 
commercial art. (The goods which the latter advertise have an absolute 
priority in our value system. Such aesthetic considerations as a view of the 
countryside accordingly come second. On such matters, we are consistent.) 
They picnic on exquisitely packaged food from a portable icebox by a 
polluted stream and go on to spend the night at a park which is a menace to 
public health and morals. Just before dozing off on an air mattress, beneath 
a nylon tent, amid the stench of decaying refuse, they may reflect vaguely 
on the curious unevenness of their blessings. Is this, indeed, the American 


In the production of goods within the private economy, it has long been 
recognized that a tolerably close relationship must be maintained between 
the production of various kinds of products. The output of steel and oil and 


machine tools is related to the production of automobiles. Investment in 
transportation must keep abreast of the output of goods to be transported. 
The supply of power must be abreast of the growth of industries requiring 
it. The existence of these relationships—coefficients to the economist— 
has made possible the construction of the input-output table which shows 
how changes in the production in one industry will increase or diminish 
the demands on other industries. To this table, and more especially to its 
ingenious author, Professor Wassily Leontief, the world is indebted for one 
of its most important of modern insights into economic relationships. If 
expansion in one part of the economy were not matched by the requisite 
expansion in other parts—were the need for balance not respected—then 
bottlenecks and shortages, speculative hoarding of scarce supplies and 
sharply increasing costs would ensue. Fortunately in peacetime the market 
system, combined with considerable planning, serves to maintain this 
balance, and this, together with the existence of stocks and some flexibility 
in the coefficients as a result of substitution, ensures that no serious 
difficulties will arise. We are reminded of the problem only by noticing 
how serious it was for those countries which sought to solve it by a more 
inflexible planning and often with a much smaller supply of resources. 

Just as there must be balance in what a community produces, so there 
must also be balance in what the community consumes. An increase in the 
use of one product creates, ineluctably, a requirement for others. If we are 
to consume more automobiles, we must have more gasoline. There must 
be more insurance as well as more space on which to operate them. 
Beyond a certain point, more and better food appears to mean increased 
need for medical services. This is the certain result of increased 
consumption of tobacco and alcohol. More vacations require more hotels 
and more fishing rods. And so forth. 

However, the relationships we are here discussing are not confined to 
the private economy. They operate comprehensively over the whole span 
of private and public services. As surely as an increase in the output of 
automobiles puts new demands on the steel industry so, also, it places new 
demands on public services. Similarly, every increase in the consumption 
of private goods will normally mean some facilitating or protective step by 
the state. In all cases if these services are not forthcoming, the 
consequences will be in some degree ill. It will be convenient to have a 
term which suggests a satisfactory relationship between the supply of 
privately produced goods and services and those of the state, and we may 


call it Social Balance. 

The problem of social balance is ubiquitous, and frequently it is 
obtrusive. As noted, an increase in the consumption of automobiles 
requires a facilitating supply of streets, highways, traffic control and 
parking space. The protective services of the police and the highway 
patrols must also be available, as must those of the hospitals. Although the 
need for balance here is extraordinarily clear, our use of privately 
produced vehicles has, on occasion, got far out of line with the supply of 
the related public services. That result has been hideous road congestion, a 
human massacre of impressive proportions and chronic colitis in the cities. 
As on the ground, so also in the air. Planes are delayed or collide over 
airports with disquieting consequences for passengers when the public 
provision for air traffic control fails to keep pace with the private use of 
the airways. 

But the auto and the airplane, versus the space to use them, are merely 
an exceptionally visible example of a requirement that is pervasive. The 
more goods people procure, the more packages they discard and the more 
trash that must be carried away. If the appropriate sanitation services are 
not provided, the counterpart of increasing opulence will be deepening 
filth. The greater the wealth, the thicker will be the dirt. This indubitably 
describes a tendency of our time. As more goods are produced and owned, 
the greater are the opportunities for fraud and the more property that must 
be protected. If the provision of public law enforcement services does not 
keep pace, the counterpart of increased well-being will, we may be certain, 
be increased crime. 

The city of Los Angeles, in modern times, was the near-classic study in 
the problem of social balance. Magnificently efficient factories and oil 
refineries, a lavish supply of automobiles, a vast consumption of 
handsomely packaged products, coupled for many years with the absence 
of a municipal trash collection service which forced the use of home 
incinerators, made the air nearly unbreathable for an appreciable part of 
each year. Air pollution could be controlled only by a complex and highly 
developed set of public services—by better knowledge of causes stemming 
from more public research, public requirement of pollution control devices 
on cars, a municipal trash collection service and possibly the assertion of 
the priority of clean air over the production of goods. These were long in 
coming. The agony of a city without usable air was the result. 


The issue of social balance can be identified in many other current 
problems. Thus an aspect of increasing private production is the 
appearance of an extraordinary number of things which lay claim to the 
interest of the young. Motion pictures, television, automobiles and the vast 
opportunities which go with the mobility they provide, together with such 
less enchanting merchandise as narcotics, comic books and pomographia, 
are all included in an advancing Gross Domestic Product. The child of a 
less opulent as well as a technologically more primitive age had far fewer 
such diversions. The red schoolhouse is remembered mainly because it had 
a paramount position in the lives of those who attended it that no modern 
school can hope to attain. 

In a well-run and well-regulated community, with a sound school 
system, good recreational opportunities and a good police force—in short, 
a community where public services have kept pace with private production 
—the diversionary forces operating on the modern juvenile may do no 
great damage. Television and the violent mores of Hollywood must 
contend with the intellectual discipline of the school. The social, athletic, 
dramatic and like attractions of the school also claim the attention of the 
child. These, together with the other recreational opportunities of the 
community, minimize the tendency to delinquency. Experiments with 
violence and immorality are checked by an effective law enforcement 
system before they become epidemic. 

In a community where public services have failed to keep abreast of 
private consumption, things are very different. Here, in an atmosphere of 
private opulence and public squalor, the private goods have full sway. 
Schools do not compete with television and the movies. The dubious 
heroes of the latter, not Ms. Jones, become the idols of the young. 
Violence replaces the more sedentary recreation for which there are 
inadequate facilities or provision. Comic books, alcohol, narcotics and 
switchblade knives are, as noted, part of the increased flow of goods, and 
there is nothing to dispute their enjoyment. There is an ample supply of 
private wealth to be appropriated and not much to be feared from the 
police. An austere community is free from temptation. It can be austere in 
its public services. Not so a rich one. 

Moreover, in a society which sets large store by production, and which 
has highly effective machinery for synthesizing private wants, there are 
strong pressures to have as many wage earners in the family as possible. 

As always, all social behavior is of a piece. If both parents are engaged in 
private production, the burden on the public services is further increased. 
Children, in effect, become the charge of the community for an 
appreciable part of the time. If the services of the community do not keep 
pace, this will be another source of disorder. 

Residential housing also illustrates the problem of the social balance, 
although in a somewhat complex form. Few would wish to contend that, in 
the lower or even the middle income brackets, Americans are munificently 
supplied with housing. A great many families would like better located or 
merely more houseroom, and no advertising is necessary to persuade them 
of their wish. And the provision of housing is in the private domain. At 
first glance at least, the line we draw between private and public seems not 
to be preventing a satisfactory allocation of resources to housing. 

On closer examination, however, the problem turns out to be not 
greatly different from that of education. It is improbable that the housing 
industry is greatly more incompetent or inefficient in the United States 
than in those countries—Scandinavia, Holland, or (for the most part) 
England—where slums have been largely eliminated and where minimum 
standards of cleanliness and comfort are well above our own. As the 
experience of these countries shows, and as we have also been learning, 
the housing industry functions well only in combination with a large, 
complex and costly array of public services. These include land purchase 
and clearance for redevelopment; good neighborhood and city planning, 
and effective and well-enforced zoning; a variety of financing and other 
aids to the house-builder and owner; publicly supported research and 
architectural services for an industry which, by its nature, is equipped to do 
little on its own; and a considerable amount of direct or assisted public 
construction and good maintenance for families in the lowest income 
brackets. The quality of the housing depends not on the industry, which is 
given, but on what is invested in these supplements and supports. - 


The case for social balance has, so far, been put negatively. Failure to keep 
public services in minimal relation to private production and use of goods 
is a cause of social disorder or impairs economic performance. The matter 
may now be put affirmatively. By failing to exploit the opportunity to 


expand public production, we are missing opportunities for enjoyment 
which otherwise we might have. Presumably a community can be as well 
rewarded by buying better schools or better parks as by buying more 
expensive automobiles. By concentrating on the latter rather than the 
former, it is failing to maximize its satisfactions. As with schools in the 
community, so with public services over the country at large. It is scarcely 
sensible that we should satisfy our wants in private goods with reckless 
abundance, while in the case of public goods, on the evidence of the eye, 
we practice extreme self-denial. So, far from systematically exploiting the 
opportunities to derive use and pleasure from these services, we do not 
supply what would keep us out of trouble. 

The conventional wisdom holds that the community, large or small, 
makes a decision as to how much it will devote to its public services. This 
decision is arrived at by democratic process. Subject to the imperfections 
and uncertainties of democracy, people decide how much of their private 
income and goods they will surrender in order to have public services of 
which they are in greater need. Thus there is a balance, however rough, in 
the enjoyments to be had from private goods and services and those 
rendered by public authority. 

It will be obvious, however, that this view depends on the notion of 
independently determined consumer wants. In such a world, one could 
with some reason defend the doctrine that the consumer, as a voter, makes 
an independent choice between public and private goods. But given the 
dependence effect—given that consumer wants are created by the process 
by which they are satisfied—the consumer makes no such choice. He or 
she is subject to the forces of advertising and emulation by which 
production creates its own demand. Advertising operates exclusively, and 
emulation mainly, on behalf of privately produced goods and services. - 
Since management of demand and emulative effects operate on behalf of 
private production, public services will have an inherent tendency to lag 
behind. Automobile demand which is expensively synthesized will 
inevitably have a much larger claim on income than parks or public health 
or even roads where no such influence operates. The engines of mass 
communication, in their highest state of development, assail the eyes and 
ears of the community on behalf of more beverages but not of more 
schools. Even in the conventional wisdom it will scarcely be contended 
that this leads to an equal choice between the two. 


The competition is especially unequal for new products and services. 
Every corner of the public psyche is canvassed by some of the nation's 
most talented citizens to see if the desire for some merchantable product 
can be cultivated. No similar process operates on behalf of the 
nonmerchantable services of the state. Indeed, while we take the 
cultivation of new private wants for granted, we would be measurably 
shocked to see it applied to public services. The scientist or engineer or 
advertising man who devotes himself to developing a new carburetor, 
cleanser or depilatory for which the public recognizes no need and will 
feel none until an advertising campaign arouses it, is one of the valued 
members of our society. A politician or a public servant who sees need for 
a new public service may be called a wastrel. Few public offenses are 
more reprehensible. 

So much for the influences which operate on the decision between 
public and private production. The calm decision between public and 
private consumption pictured by the conventional wisdom is, in fact, a 
remarkable example of the error which arises from viewing social behavior 
out of context. The inherent tendency will always be for public services to 
fall behind private production. We have here the first of the causes of 
social imbalance. 


Social balance is also the victim of two further features of our society—the 
truce on inequality and the tendency to inflation. Since these are now part 
of our context, their effect comes quickly into view. 

With rare exceptions such as the postal service, public services do not 
carry a price ticket to be paid for by the individual user. By their nature, 
they must, ordinarily, be available to all. As a result, when they are 
improved or new services are initiated, there is the ancient and 
troublesome question of who is to pay. This, in turn, provokes to life the 
collateral but irrelevant debate over inequality. As with the use of taxation 
as an instrument of fiscal policy, the truce on inequality is broken. Liberals 
are obliged to argue that the services be paid for by progressive taxation 
which will reduce inequality. Committed as they are to the urgency of 
goods (and also, as we shall see in a later chapter, to a somewhat 
mechanical view of the way in which the level of output can be kept most 

secure), they must oppose sales and excise taxes. Conservatives rally to the 
defense of inequality—although without ever quite committing themselves 
in such uncouth terms—and oppose the use of income taxes. They, in 
effect, oppose the expenditure not on the merits of the service but on the 
demerits of the tax system. Since the debate over inequality cannot be 
resolved, the money is frequently not appropriated and the service not 
performed. It is a casualty of the economic goals of both liberals and 
conservatives, for both of whom the questions of social balance are 
subordinate to those of production and, when it is evoked, of inequality. 

In practice, matters are better as well as worse than this description of 
the basic forces suggests. Given the tax structure, the revenues of all levels 
of government grow with the growth of the economy. Services can be 
maintained and sometimes even improved out of this automatic accretion. 

However, this effect is highly unequal. The revenues of the federal 
government, because of its heavy reliance on progressive income taxes, 
increase more than proportionately with private economic growth. In 
addition, although the conventional wisdom greatly deplores the fact, 
federal appropriations have only an indirect bearing on taxation. Public 
services are considered and voted on in accordance with their seeming 
urgency. Initiation or improvement of a particular service is rarely, except 
for purposes of oratory, set against the specific effect on taxes. Tax policy, 
in turn, is decided on the basis of the level of economic activity, the 
resulting revenues, expediency and other considerations. Among these, the 
total of the thousands of individually considered appropriations is but one 
factor. In this process, the ultimate tax consequence of any individual 
appropriation is de minimus, and the tendency to ignore it reflects the 
simple mathematics of the situation. Thus it is possible for the Congress to 
make decisions affecting the social balance without invoking the question 
of inequality. 

Things are made worse, however, by the fact that a large proportion of 
the federal revenues are pre-empted by defense. The increase in defense 
costs has also tended to absorb a large share of the normal increase in tax 
revenues. The position of the federal government for improving the social 
balance has also been weakened since World War II by the strong, 
although receding, conviction that its taxes are at artificial levels and that a 
tacit commitment exists to reduce taxes at the earliest opportunity. 

In the states and localities, the problem of social balance is much more 

severe. Here tax revenues—this is especially true of the general properly 
tax—increase less than proportionately with increased private production. 
Budgeting too is far more closely circumscribed than in the case of the 
federal government—only the monetary authority enjoys the pleasant 
privilege of underwriting its own loans. Because of this, increased services 
for states and localities regularly pose the question of more revenues and 
more taxes. And here, with great regularity, the question of social balance 
is lost in the debate over equality and social equity. 

Thus we currently find by far the most serious social imbalance in the 
services performed by local governments. The F.B.I. comes much more 
easily by funds than the city police force. The Department of Agriculture 
can more easily keep its pest control abreast of expanding agricultural 
output than the average city health service can keep up with the needs of 
an expanding industrial population. One consequence is that the federal 
government remains under constant and highly desirable pressure to use its 
superior revenue position to help redress the balance at the lower levels of 


Finally, social imbalance is the natural offspring of inflation. In the past, 
inflation had two major effects on public services. Wages in the public 
service tended to lag well behind those in private industry. There was thus 
an incentive to desert public for private employment. More important, in 
the United States the most urgent problems of social balance involve the 
services of states and localities and, most of all, those of the larger cities. 
Increasing population, increasing urbanization and increasing affluence all 
intensify the public tasks of the metropolis. Meanwhile the revenues of 
these units of government, in contrast with those of the federal 
government, are relatively inelastic. In consequence of the heavy 
dependence on the property tax, when prices rise, the revenues of these 
units of government lag behind. The problem of financing services thus 
becomes increasingly acute as and when inflation proceeds. 

In very recent times in the larger cities, stronger union organization 
among municipal employees has arrested and in some communities 
reversed the tendency for wages of public workers to lag. So the 
competitive position of the public services does not, with inflation, 


automatically become adverse. But the inelasticity of the revenues 
remains. And with high labor costs, the constraints on services—cuts, on 
occasion, instead of urgent expansion—have become more severe. 


A feature of the years immediately following World War II was a 
remarkable attack on the notion of expanding and improving public 
services. During the depression years, such services had been elaborated 
and improved partly in order to fill some small part of the vacuum left by 
the shrinkage of private production. During the war years, the role of 
government was vastly expanded. After that came the reaction. Much of it, 
unquestionably, was motivated by a desire to rehabilitate the prestige of 
private production and therewith of producers. No doubt some who joined 
the attack hoped, at least tacitly, that it might be possible to sidestep the 
truce on taxation vis-a-vis equality by having less taxation of all kinds. For 
a time, the notion that our public services had somehow become inflated 
and excessive was all but axiomatic. Even liberal politicians did not 
seriously protest. They found it necessary to aver that they were in favor of 
rigid economy in public spending too. 

In this discussion, a certain mystique was attributed to the satisfaction 
of privately supplied wants. A community decision to have a new school 
means that the individual surrenders the necessary amount, willy-nilly, in 
his taxes. But if he is left with that income, he is a free man. He can decide 
between a better car or a television set. The difficulty is that this argument 
leaves the community with no way of preferring the school. All private 
wants, where the individual can choose, are inherently superior to all 
public desires which must be paid for by taxation and with an inevitable 
component of compulsion. 

The cost of public services was also held to be a desolating burden on 
private production, although this was at a time when the private production 
was burgeoning. Urgent warnings were issued of the unfavorable effects of 
taxation on investment—"I don't know of a surer way of killing off the 
incentive to invest than by imposing taxes which are regarded by people as 
punitive."- This was at a time when the inflationary effect of a very high 
level of investment was causing concern. The same individuals who were 
warning about the inimical effects of taxes were strongly advocating a 


monetary policy designed to reduce investment. However, an 
understanding of our economic discourse requires an appreciation of one 
of its basic rules: men of high position are allowed, by a special act of 
grace, to accommodate their reasoning to the answer they need. Logic is 
only required in those of lesser rank. 

Finally, it was argued, with no little vigor, that expanding government 
posed a grave threat to individual liberties. "Where distinction and rank is 
achieved almost exclusively by becoming a civil servant of the state ... it is 
too much to expect that many will long prefer freedom to security. 

With time, the disorder associated with social imbalance has become 
visible even if the need for balance between private and public services is 
still imperfectly appreciated. The onslaught on the public services has left 
a lasting imprint. To suggest that we canvass our public wants to see where 
happiness can be improved by more and better services has a sharply 
radical tone. Even public services that prevent disorder must be defended. 
By contrast, the man who devises a nostrum for a nonexistent need and 
then successfully promotes both remains one of nature's noblemen. 


18. The Investment Balance 

social balance relates to the goods and services we consume. There is an 
allied problem in the way we commit the resources that are available for 
investment in the economy. The same forces which bring us our plenitude 
of private goods and leave us poverty-stricken in our public services also 
act to distort the distribution of investment as between ordinary material 
capital and what we may denote as the personal capital of the country. This 
distortion has far-reaching effects. One of them is to impair the production 
of private goods themselves. The situation will be seen in sharpest focus if 
we pursue the latter point. It is not, however, the only or, indeed, the most 
important consequence. 

Economic growth—the expansion of economic output—requires an 
increase in the quantity of the productive plant and equipment of the 
country or in its quality or, as in the usual case, in both. This is fully 
agreed. The increase in quantity is capital formation. The increase in 
quality is technological advance. 

In the earliest stages of economic development, from which so many of 
our economic attitudes are derived, the simple and sufficient way of 
getting more growth was to have more saving and therefore more material 
capital. Entrepreneurial talent was needed but, at least in western 
countries, it was almost invariably, if not invariably, forthcoming. To 
perform this function required some education. But, as the example of any 
number of great entrepreneurs from Commodore Vanderbilt to Henry Ford 
made clear, the education could be exiguous and often was. The existence 
of an educated and literate body of workers was desirable but by no means 
essential. Some of the greatest industrial enterprises in the United States in 
the past were manned principally by men who could write no language, 
speak no English. Most important, in all the earlier stages of development 
there was no close and predictable correlation between the supply of 
educated men and the nature of their training and the rate of technological 
innovation. Inventions were more often the result of brilliant flashes of 
insight than the product of long prepared training and development. The 
Industrial Revolution in England was ushered in by the invention of the 
flying shuttle by John Kay, the spinning jenny by James Hargreaves, the 
spinning frame by (presumptively) Richard Arkwright and, of course, by 
James Watt's steam engine. These represented vast improvements in the 


capital which was being put to industrial use. But only in the case of Watt 
could the innovation be related to previous education and preparation. Kay 
and Hargreaves were simple weavers with a mechanical turn of mind. 
Arkwright had been apprenticed as a boy as a barber and a wigmaker and 
was barely literate. 

However, with the development of a great and complex industrial 
plant, and even more with the development of a great and sophisticated 
body of basic science and of experience in its application, all this has been 
changed. In addition to the entrepreneurs (and perhaps one should add the 
accountants and clerks) who were more or less automatically forthcoming, 
modern economic activity now requires a great number of trained and 
qualified people. Investment in human beings is, prima facie, as important 
as investment in material capital. The one, in its modern complexity, 
depends on the other. 

What is more important, the improvement in capital—technological 
advance—is now almost wholly dependent on investment in education, 
training and scientific opportunity for individuals. One branch of the 
conventional wisdom clings nostalgically to the conviction that brilliant, 
isolated and intuitive inventions are still a principal instrument of 
technological progress and can occur anywhere and to anyone. Benjamin 
Franklin is the sacred archetype of the American genius and nothing may 
be done to disturb his position. But in the unromantic fact, innovation has 
become a highly organized enterprise. The extent of the result is 
predictably related to the quality and quantity of the resources being 
applied to it. These resources are men and women. Their quality and 
quantity depends on the extent of the investment in their education, 
training and opportunity. They are the source of technological change. 
Without them investment in material capital will still bring growth, but it 
will be the inefficient growth that is combined with technological 


We come now to the nub of the problem. Investment in material capital is 
distributed to the various claimant industries by decision within the private 
sector. If growth prospects are good or earnings are high (at the margin) in 
the oil industry and low in the textile business, it is in the oil industry that 


capital will be invested. This allocation system works, it would appear, 
with tolerable efficiency. Among the recognized crimes of economics, any 
interference with the "free flow" of capital has a very high standing.- 

But while this flow operates as between different material claimants on 
investment funds, it operates only with manifest uncertainty and 
inefficiency as between material and personal capital. Nearly all of the 
investment in individuals is in the public domain. It is the state which, 
through primary and secondary schools, and through the colleges and 
universities, makes the largest investment in individuals. And where, as in 
the case of private colleges and universities, the state is not directly 
involved, the amount of the investment is not directly related to the 
eventual pay-out in production. Investment in refineries being higher than 
in textile mills, the refineries will draw investment funds. But engineers to 
design the refineries maybe even more important—in effect, yield a higher 
return. And the highest return of all may come from the scientist who 
makes a marked improvement in the refining process. These are not 
imaginative possibilities but common probabilities. Yet the high return to 
scientific and technical training does not cause the funds to move from 
material capital to such investment. There is no likely flow from the 
building of the refineries to the education of the scientists. Here, at the 
most critical point in the vaunted process of investment resource 
allocation, is an impediment of towering importance. Characteristically, 
however, it has received little comment. It is not, like the tariff or 
monopoly, one of the classic barriers to capital movement. Hence, it did 
not get a foothold in economics in the last century and, accordingly, under 
the intellectual grandfather clause which has such sway in the subject, it 
has no real standing now. 

There can be no question of the importance of the impediment. 
Investment in individuals is in the public domain; this investment has 
become increasingly essential with the advance of science and technology; 
and there is no machinery for automatically allocating resources as 
between material and human investment. But this is not all. As we have 
seen in earlier chapters, there is active discrimination against the 
investment in the public domain. The investment in the refinery is an 
unmitigated good. It adds to our stock of wealth. It is a categorical 
achievement. But the training of the scientists and engineers who will run 
the refinery, improve its economic efficiency, and possibly in the end 
replace it with something better is not a categorical good. The money so 


invested in education is part of the burden of government. Many still judge 
the excellence of the achievement by the smallness of this burden. Others 
will hold the investment, i.e., the burden, in abeyance while arguing over 
who should pay—in effect reviving the ancient issue of the relation of the 
tax system to the increase of equality. Some part of the investment must be 
begged as a grace from the rich—or their foundations. Even the prestige of 
the word investment itself is not regularly accorded to these outlays. A 
century and more ago, when education was not intimately related to 
production, men sensibly confined the word investment to the increases in 
capital which brought a later increase in product. Education was correctly 

regarded as a consumer outlay. The popular usage has never been revised. 


Could it be legally arranged that youngsters were sorted out at an early 
age, possibly by their test score in mathematics, and the promising then be 
indentured for life to a particular corporation, the flow of investment into 
human development might soon be placed on a rough parity with that into 
material capital. Firms would perceive the need for investing in their 
scientific and engineering stock much as major league baseball clubs once 
learned the wisdom of investing in farm teams. Under ideal arrangements, 
any surplus talent could be marketed. The cost of unsuccessfully trying to 
educate the inevitable errors of selection would be either written off or 
partially retrieved by using the individuals as salesmen. Under such a 
system, which as noted would unfortunately involve the elimination of the 
liberty of choice of the individuals in question, investment in human 
beings would rise and at a rapid rate. 

But so long as free choice remains, such investment must remain 
largely a public function. The individual, since he is only at the beginning 
of earning power, cannot himself make any appreciable part of the 
investment. Whether his parents can and will be willing to do so depends 
heavily on accident. His future employer can hardly be expected to invest 
in an asset that may materialize in the plant of a competitor or another 
industry. At most he will, as now, distribute a few scholarships and 
fellowships along with help-wanted advertising in the hope of ultimately 
influencing the choice of those in whom the investment is nearly complete. 
This has no appreciable effect on the total of the investment in people. It is 
a scalping operation. It does, however, suggest the store which is set by the 
resulting assets. 



Human development, in other words, is what economists have long termed 
an external economy.- Its benefits accrue to all firms; it is not sufficiently 
specific to any one to be bought and paid for by it. 

What is true of human development is also true of one of its principal 
fruits. That is scientific research. A society which sets for itself the goal of 
increasing its supply of goods will tend, inevitably, to identify all 
innovation with additions to, changes in, or increases in its stock of goods. 
It will assume, accordingly, that most research will be induced and 
rewarded by the market. 

Much will be. Under the proper circumstances—firms must be of 
adequate size in the industry, and certain other conditions must be met-— 
we may expect the economy to do a superior job of inventing, developing 
and redesigning consumers' goods and improving their process of 
manufacture. Nor is there reason to doubt that similar attention will be 
given, under equally favorable circumstances, to the capital goods 
industries which support this consumers' goods consumption. Much of this 
achievement will impress us only so long as we do not inquire how the 
demand for the products so developed is contrived and sustained. If we do, 
we are bound to observe that much of the research effort—as in the 
automobile industry—is devoted to discovering changes that can be 
advertised. The research program will be built around the need to devise 
"selling points" and "advertising pegs" or to accelerate "planned 
obsolescence." All this suggests that the incentive will be to allocate 
research resources to what, in some sense, are the least important things. 
The quantity is more impressive than the way it is allocated. Still, one 
would not wish to suggest that the American economy is delinquent in the 
attention it devotes to change and improvement in consumers' goods. 
Clearly it is not. 

These incentives, however, operate over but a small part of total 
scientific and research activity and, indeed, over but a small part that is 
potentially applicable to the production of goods. Thus a very large 
amount of highly useful research cannot be specialized to or be sustained 
by any marketable product. This is most obviously true of much so-called 
basic research. But it is also true of a large amount of applied effort. The 
modern air transport is the stepchild of the military airplane. It would not 


have sustained the underlying research and development endeavor on its 
own. The same is true in even greater degree of the nonmilitary uses of 
nuclear energy. And of the communications satellite and the computer. 

It is because military considerations have induced a large allocation of 
resources to research that this problem is, on the whole, less striking than 
that of investment in personal resources. Although the research must be in 
the public domain, military urgency or what is so asserted has helped to 
offset this blight. There is little comfort for man in the circumstances 
which have induced this allocation of resources or from the resulting 
weapons. But it has catalyzed a considerable amount of scientific 
innovation and development. Far more significant research lies back of the 
effort to exceed the speed of sound than lies back of even the best new 
soap. It may well be more significant for industry itself. In any event, the 
rate of technical progress in American industry in recent decades would 
have been markedly slower had it not been for militarily inspired and for 
this reason publicly supported research. 


As noted, one must, where possible, deal with the conventional wisdom on 
its own terms. The conventional wisdom stresses the paramount urgency 
of increased production of goods. To show that even for this purpose its 
allocation of investment is irrational—that it is tolerable for research only 
as a by-product of military claims and that for investment in individuals it 
can make no claim at all to rationality—is impressive. However, it would 
be barbarous to suggest that the only claim to be made on behalf of 
education is the increased production of goods. It has its independent and, 
one must suppose, its higher justification. A horse almost certainly 
appreciates a comfortable stable, a secure supply of oats, a measure of 
recreation, and conceivably the pleasure of being esteemed at least as 
highly as any other horse in the stable. The nontheological quality which 
most distinguishes men from horses is the desire, in addition to these 
attributes of material and psychic well-being, to know, understand and 
reason. One may hope that investment in the things that differentiate man 
from his animals requires no further justification. If, however, this 
investment is less than would be justified even for the production of goods, 
one wonders how very much less than the ideal it must be for the purposes 
of human satisfaction and fulfillment. 



A final and rather more speculative issue remains, which is the joint legacy 
of the problem of social balance in consumption and of balanced 
investment in material and personal capital. 

As Chapter 13 has argued, the process by which wants are now 
synthesized is a potential source of economic instability. Production and 
therewith employment and social security are dependent on an inherently 
unstable process of consumer debt creation. This may one day falter. And 
a decay in emulative compulsions or in the ability to synthesize demand 
could bring a fall in consumption, an increase in unemployment and a 
difficult problem of readjustment. 

However great or small these dangers, they will be lessened if our 
consumption is widely distributed—if productive energies serve uniformly 
the whole span of man's wants. Since public wants are generally not 
contrived,- they are not subject to a failure of contrivance. Since they are 
not sold on the installment plan, they are not subject to curtailment by any 
of the factors which may make people unwilling or unable to incur debt. 
Thus the better the social balance, the more immune the economy to 
fluctations in private demand. 

There is another and opposite possibility. Simple minds, presumably, 
are the easiest to manage. Better education, one product of improved social 
balance, might well be expected to lessen the effectiveness of synthesis 
and emulation in the manufacture of new wants. Synthesis and emulation 
are most persuasive in creating desire for simple physical objects of 
consumption or simple modes of enjoyment which require no previous 
conditioning of the consumer. Houses; automobiles; the uncomplicated 
forms of alcohol, food and sexual enjoyment; sports; and movies require 
little prior preparation of the subject for the highest enjoyment. A mass 
appeal is thus successful, and hence it is on these things that we find 
concentrated the main weight of modern want creation. By contrast, more 
esoteric desires—music and fine arts, literary and scientific interests, and 
to some extent even travel—can normally be synthesized, if at all, only on 
the basis of a good deal of prior education. 

Education, therefore, is a double-edged sword for the affluent society. 
It is essential, given the technical and scientific requirements of modern 


industry. But by widening tastes and also inducing more independent and 
critical attitudes, it undermines the want-creating power which is 
indispensable to the modem economy. The effect is enhanced as education 
enables people to see how they are managed in the interest of the 
mechanism that is assumed to serve them. The ultimate consequence is 
that the values of the affluent society, its preoccupation with production as 
a test of performance in particular, are undermined by the education that is 
required in those who serve it. 

Or so it could be. For so stern have been the forces channeling our 
thoughts in the past that there is little to go on in these fertile valleys of the 


19. The Transition 

in one sense, the main task of this essay has been accomplished. Its 
concern has been with the thralldom of a myth—the myth that the 
production of goods, by its overpowering importance and its ineluctable 
difficulty, is the central problem of our lives. We have now seen the 
sources of this myth. And we have seen some of the consequences—the 
tenuous and maybe dangerous process of consumer-demand creation, 
social imbalance—to which the myth commits us. Emancipation of the 
mind is a no less worthy enterprise than emancipation of the body. The 
bondsman, given his freedom and persuaded of its virtues, is ordinarily left 
to enjoy it. Nor is his emancipator blamed for failing to give him a list of 
things to do. 

A concern for new goals, once the old ones become suspect, is not only 
the next order of philosophical inquiry but the inevitable one. Social 
philosophy, far more than nature, abhors a vacuum. Men must see a 
purpose in their efforts. This purpose can be nonsensical and, as we have 
seen, if it is elaborately nonsensical, that is all to the good. Men can labor 
to make sense out of single steps toward the goal without ever pausing to 
reflect that the goal itself is ludicrous. But they must not question the goal. 
For to do so is to initiate a search for one that serves better. Thus it is that 
an essay such as this is far more important for what it destroys—or to 
speak more accurately, for the destruction which it crystallizes, since the 
ultimate enemy of myth is circumstance—than for what it creates. 

This is sharply at odds with the conventional wisdom. The latter sets 
great store by what it calls constructive criticism. And it reserves its scorn 
for what it is likely to term a purely destructive or negative position. In 
this, as so often, it manifests a sound instinct for self-preservation. The 
attack on the conventional or accepted thought is dismissed as an inferior 
and, indeed, a wanton activity and, as such, not something that should be 
taken seriously. At the same time, "constructive alternatives" are invited. 
These are a much lower order of danger. The threat to the conventional 
wisdom is always its own irrelevance, not the appeal of a relevant 
alternative. In postwar West Germany, in contrast with the Weimar 
regime, governments displayed notable stability of tenure. Some credit 
went to the constitutional provision for the so-called "constructive veto." 
This, in effect, required the parliament to decide on a new administration 


before it voted out the old one. To settle in advance on such an alternative 
is difficult or impossible. Thus parliaments had no choice but to maintain 
the status quo. The conventional wisdom finds similar strength in asserting 
the moral superiority of constructive criticism. 

However, as always, it is sound strategy to deal with the conventional 
wisdom on its own terms. If it inquires how we escape the present 
preoccupation with production; or how we escape the race to manufacture 
more wants for more goods and then yet more wants for yet more goods; 
or what is to fill the seemingly vast vacuum which abandoning this race 
would leave in our lives; or what are to be the symbols of happiness if 
goods cease to be so regarded, then it is well that there be answers. The 
defenses of the conventional wisdom are formidable. One should not 
concede it any points. What replaces the profound preoccupation with 


In the world of minor lunacy, the behavior of both the utterly rational and 
the totally insane seems equally odd. The notion that ours, inevitably, is a 
world in which production is of supreme urgency is an old one. So is the 
corresponding behavior. The discovery that production is no longer of 
such urgency—that it is something of which we are reasonably assured 
and which, paradoxically, is most threatened by our failure to see it in 
proper perspective -—involves a major wrench in our attitudes. What was 
sound economic behavior before cannot be sound economic behavior now. 
What were the goals of individuals, organizations and, perhaps more 
especially, of government before may not be so now. Many who will find 
it possible to believe that production has lost its pristine urgency will still 
find the changes in behavior and policy that this suggests rather difficult to 
swallow. This behavior and these policies will have an air of fecklessness, 
even of danger. And this, needless to say, will be exploited vigorously by 
the conventional wisdom. 

It was ever so. During the great depression, many could agree that the 
clear and immediate cause of difficulty was a shortage of demand for 
goods. That the private economy might find its equilibrium not with a 
demand sufficient to ensure full employment but at a level where 
substantial millions were left unemployed seemed plausible enough. Yet, 


having conceded all this, it was still not easy for a long while to agree that 
the government should supplement the deficient private demand by public 
borrowing and spending for employment. This seemed vastly reckless. The 
Keynesian diagnosis was one thing, but the Keynesian remedy was 

Life and certainly the language would be simpler were we to accept 
change, and the consequent policies, at their face value. But it would also 
destroy an engaging, almost Oriental, quality of our political life which 
leads us to drape the urgencies of the present in the symbols of the past. 
Though production has receded in importance, we shall doubtless continue 
to pretend that it isn't so. 


For the number of questions which we agree to resolve in accordance with 
whether production is aided or retarded—made more or less important—is 
enormous. If something seems to contribute to increased production, it is 
good. If it fails to do so, it is useless. If it damages production, it is evil. If 
it can be shown that a tax is damaging to incentives and thus to production, 
it is per se a bad tax; and even if this result cannot be shown, it is still 
worth alleging. Our oldest and for some still the most beloved topic of 
controversy is the tariff. Its enemies have always argued that the industries 
it nurtures are inefficient—that resources could be used more efficiently 
elsewhere. They have never doubted that efficiency was the decisive 
consideration. And their opponents, while challenging the defense of the 
higher efficiency of free trade in various ways, never challenged that 
criterion as such. 

Similarly, the debate over the large corporation has been concerned 
almost exclusively with its efficiency. Its defenders have justified it by its 
competence as a producer. Its critics have held that it has exceeded the 
optimally efficient size. 2 The corporation is a creature of no small political 
importance. Until very recently this aspect of its existence has been 
uniformly dismissed as of small account. As with the corporation, so with 
the trade union. It is defended or condemned in accordance with its effect 
on the productivity of its members. That it has made work more tolerable; 
has enhanced the dignity of its members; and, through seniority rules, 
accorded its members what seem to be the natural rights of advancing age 


are not decisive. The decisive thing is the effect these have had on 

If a locality is declining—if power, transportation, raw material 
supplies, consumer taste or the tax laws have given other areas or countries 
an advantage—then one should encourage the people to leave. Mobility 
means efficiency. It is true that the ties of family, friends, pastor and priest, 
countryside and mere inertia may make this a Draconian and even cruel 
prescription. But it is the efficient course. Until relatively recent times, a 
large amount of industrial and occupational disease could be justified on 
the grounds that considerations of cost did not permit of its elimination. 
Such a contention is no longer acceptable in the conventional wisdom. The 
latter would not hesitate, however, to point out that the concessions won 
over the years by the coal miners have speeded the relative decline of that 
industry in many areas. Given the importance of production, this was most 

But if things produced are not of great urgency, it follows that the 
efficiency of the process by which they are produced ceases to be an 
overriding consideration. New and usually much more difficult tests must 
be applied. It is not unlikely, indeed, that these will already be found 
playing a considerable but surreptitious role and this now becomes 

Thus the argument over the progressive income tax has long been 
concerned with its effect on efficiency. Some have argued that it impairs 
incentives to increased efficiency. Others have argued that it does not. But 
if efficiency is not decisive, then the debate must go forward on other 
grounds. These may well include the simple and uncouth question of who 
is to pay how much. It is with this question that many who now talk about 
efficiency are really concerned. 

Moreover, if efficiency is no longer a prime criterion, tariff policy will 
have to be resolved on the basis of how far we should go in making trade 
the handmaiden of larger national policy or what part compassion should 
play in easing the problems of distressed industries or areas. In fact, trade 
policy is already partly subordinate to both international comity and local 
charity. Efficiency has already partly surrendered to these other and more 
urgent considerations. 

If the modem corporation must manufacture not only goods but the 


desire for the goods it manufactures, the efficiency of the first part of this 
activity ceases to be decisive. One could indeed argue that human 
happiness would be as effectively advanced by inefficiency in want 
creation as by efficiency in production. Under these circumstances, the 
relation of the modern corporation to the people it comprises—their 
chance for dignity, individuality and full development of personality— 
may be at least as important as its efficiency. These may be worth having 
even at a higher cost of production. Evidently the unions, in seeking to 
make life tolerable on the job, were being governed by a sound instinct. 
Why should life be intolerable to make things of small urgency? 

Attitudes toward the declining community may need, perhaps 
belatedly, to be revised. The happiness and contentment of the people of 
an old New England mill town and their preference, remarkable as it may 
now seem, for life in one of these decaying communities, was a 
consideration to be set against the efficiency with which they were 
employed. The rational and compassionate society may seek to avoid the 
heartbreaks of an industrial Diaspora. If the goods have ceased to be 
urgent, can we sternly command men to leave their homes to produce them 
with maximum efficiency? 

The Benthamite test of public policy was "what serves the greatest 
happiness of the greatest number," and happiness was more or less 
implicitly identified with productivity. This is still the official test. In 
modern times, the test has not been very rigorously applied. We have 
somewhat sensed though we have not recognized the declining importance 
of goods. Yet, even in its deteriorated form, we cling to this criterion. It is 
so much simpler than to substitute the other tests—compassion, individual 
happiness and well-being, the minimization of community or other social 
tensions—which now become relevant. 


Much more than decisions on economic policy are involved. A system of 
morality is at stake. For what we regard as the Puritan inheritance was 
soundly grounded on economic circumstance. In a country that was being 
carved from the wilderness, thrift and labor were the obligations of 
everyone, for they conserved and enlarged the supply of goods which 
sustained life itself. And the central or classical tradition of economics was 


more than an analysis of economic behavior and a set of rules for 
economic polity. It also had a moral code. The world owed no man a 
living. Unless he worked, he did not eat. The obligation thus imposed 
required him to labor on his own behalf and therewith on behalf of others. 
Failure to work, even when it could be afforded, was offensive to what 
came to be called the Victorian, but could as well have been named the 
economic, morality. "To live in idleness, even if you have the means, is 

not only injurious to yourself, but a species of fraud upon the community." 


But if the goods have ceased to be urgent, where is the fraud? Are we 
desperately dependent on the diligence of the worker who applies maroon 
enamel to the functionless metal of a motorcar? The idle man may still be 
an enemy of himself. But it is hard to say that the loss of his effort is 
damaging to society. Yet it is such damage that causes us to condemn 

Again, the fact that a man was damaging society by his failure to 
produce has been, in the last analysis, the basis for a fair amount of highly 
convenient indifference and even cruelty in our behavior. The churches 
have long featured the virtue of loving one's neighbor. But the practical 
churchman has also recognized the need to reconcile this with basic 
economic necessities. A good deal of practical heartlessness was what 
served the social good. Many people have always found it painful to work. 
To show them compassion might be to damage production. The 
heartbreaks of migration in pursuit of jobs might be considerable, but how 
much worse the inefficiency of producing in the wrong place. No tears 
should be wasted on the farmers who go bankrupt. This is the path to more 
efficient farm production. In the United States, as in other western 
countries, we have for long had a respected secular priesthood whose 
function it has been to rise above questions of religious ethics, kindness 
and compassion and show how these might have to be sacrificed on the 
altar of the larger good. That larger good, invariably, was more efficient 
production. The sacrifice obviously loses some of its point if it is on behalf 
of the more efficient production of goods for the satisfaction of wants of 
which people are not yet aware. It is even more tenuous, in its 
philosophical foundations, if it is to permit the more efficient contriving of 
wants of which people are not aware. And this latter is no insignificant 
industry in our time. 

At this point, even the most callous of readers will regard with 


sympathy the tragic implications for established ideas which the rejection 
of scarcity and the acceptance of affluence involve. The almost incredibly 
elaborate efforts of the conventional economic wisdom to protect the 
present myth become understandable. One has a sense of disloyalty, 
almost of treachery, in destroying it. 

Yet the escape from the thralldom of productive efficiency and 
unremitting labor is not without its opportunities. However, one final 
bridge must be built between the world of scarcity and that of affluence. 
For, in the world of scarcity, the need for goods was, as just noticed, 
powerfully reinforced by the compulsion to work. The individual who did 
not work, unless favored by rare circumstance, was penalized by a total 
loss of income. That penalty still persists widely even though it now 
enforces the production of relatively unimportant goods. Obviously we 
shall not reap the rewards of affluence until we solve this problem. 


20 . The Divorce of Production from 


we have seen that while our productive energies are used to make things 
of no great urgency—things for which demand must be synthesized at 
elaborate cost lest they not be wanted—the process of production 
continues to be of nearly undiminished urgency as a source of income. The 
income men derive from producing things of slight consequence is of great 
consequence to them. The production reflects the low marginal utility of 
the goods to society. The income reflects the high total utility of a 
livelihood to a person. For this reason, although there is conventional 
effort to deny it, income and employment rather than goods have become 
our basic economic concern. This is revealed in the almost uncontrollable 
tendency to t hink of depression or low growth rate not in terms of lost 
output but in terms of unemployment and of the equally powerful tendency 
to identify good times with high employment, not high production. 

Moreover, the urgency of offering employment to all who seek it is 
probably increasing. This is a natural consequence of affluence. When the 
income of the employed worker is good, it is not easy to defend a situation 
in which a small minority of workers have no employment income at all. 
Such discrimination seems altogether too flagrant. With increasing 
affluence, we are thus more firmly committed to finding jobs for everyone. 
Our situation is that of a factory which must be operated at top speed for 
three shifts and seven days a week even at some risk of eventual 
breakdown, not because the product is in demand—on the contrary, much 
ingenuity is required to clear the shipping platform—but because any 
lower rate of operation will leave some of the people in town without a 
livelihood. If that misfortune is the alternative, then the factory may have 
to be so operated. But the question of freeing the community from such 
dangerous dependence will unquestionably arise. 

In the real world, apart from the danger of breakdown,- there is the 
problem, if diminishing, of inflation. So long as we are committed by the 
imperatives of employment and income to operate at the capacity of plant 
and labor force and take no other steps, we shall enhance the threat of 
rising prices. 

The solution, or more precisely part of it, is to have some reasonably 
satisfactory substitutes for production as a source of income. This would 
loosen the present nexus between production and income and enable us to 
take a more relaxed and rational view of output without subjecting 
individual members of the society to hardship. 


An obvious device for breaking the nexus between production and income 
security is at hand—that is the system of unemployment compensation. It 
provides income apart from production. In the past, unemployment 
compensation has served two principal purposes. It has eased the hardship 
of the worker who was making a routine change of jobs such as might be 
the result of a declining demand for one product and an increasing demand 
for another. And it has protected the worker from short-run changes in the 
level of aggregate demand which, on occasion, reduced the requirement 
for workers below the presently available labor force. Unemployment 
compensation did not protect him from a continuing failure to employ the 
full labor force, for the duration of the payments was strictly limited, and 
useful though they might be as a stopgap, they were far from being a 
substitute for wage income. 

The meagerness of the payments is related to attitudes toward 
production. If production is all-important, then there should be no source 
of income that is a close substitute. People should be required to work and 
produce—or else. And, in fact, nothing has so haunted the discussion of 
social security legislation as the specter of the worker who lives amiably 
off his unemployment compensation check and contributes nothing to 
society in return. So payments have been kept at levels relevant to survival 
rather than to comfort. And the lazy worker has been faced with the fact 
that, sooner or later, his eligibility would be exhausted and he would have 
to find a job. 

Were unemployment compensation to approach the level of the weekly 
wage, we should in fact be prepared for some increase in deliberate 
idleness—in malingering as a way of life. So long as production was 
accorded priority, any increase in voluntary idleness was pro tanto 
intolerable although, in keeping with the refined illogic with which the 
conventional wisdom regarded production, involuntary unemployment in 

depression, and the consequent loss of output, were never especially 
reprehensible. But in a world where production is no longer urgent, we can 
obviously view an increase in voluntary idleness with some equanimity. 
And even if the unemployment compensation were close to the wage, it is 
not certain that the malingering would be great. Fears in this mater have 
always been extraordinarily exaggerated. When the system was being 
devised in the thirties, it was widely assumed that unemployment 
compensation, even as a badly paid alternative to toil, would be seized 
upon by a large number of people. In fact, the proportion of the active 
labor force exercising this option has always been negligible. The aversion 
to idleness is remarkably strong both in those who view with misgivings 
those who work and in those who work. The tendency to think of idleness 
as "a species of fraud upon the community" is not peculiar to the upper 
income classes, for whom, indeed, it is often considered quite tolerable. 
One problem in winning a measure of release from our present 
commitment to full employment is the stigma which for a long time for all 
social strata will continue to attach to any kind of unemployment. 


The answer is to find some way of diminishing the reliance now being 
placed on production as a source of income. This cannot, given present 
attitudes, go so far as to sanction unemployment for any considerable 
number of people who would prefer work. But it can soften the 
consequence of any failure of production to supply jobs and, therewith, a 
source of income. And it can supply income to the considerable number of 
people for whom production, as a source, works badly. And it can prevent 
these steps from leading to inflation. 

The first needed action is to bring the level of unemployment 
compensation much closer to the average weekly wage and to extend 
greatly the period of eligibility. The result, to repeat, will be some increase 
in malingering but this must be measured against the comparative 
unimportance of the goods being sacrificed. And the advantage will be in 
diminishing the pressure to operate the economy at the very highest level 
of output and employment for purely welfare reasons by diminishing 
sensibly the discomfort of those who suffer most from a failure to do so. 
This reform will require greater nationalization of the present state systems 
of unemployment compensation both in standards and funding. But this is 


a highly desirable reform in any case. 

The next step is to provide alternative sources of income, unrelated to 
production, to those whom the modern economy employs only with 
exceptional difficulty or unwisdom. The ancient reference to 
unemployment as a percentage of the total labor force implies that labor is 
more or less homogeneous in its employability; the 4 or 5 percent who are 
without work differ from the rest principally in the fact that the supply of 
jobs ran out before they were reached. This is far from being so. Those 
who are without work lack education, are young or otherwise without 
previous job experience, are unskilled or untrained and are frequently 
black. Especially they lack education. While they are unemployed, more 
qualified workers may be, indeed usually are, in great demand. To use 
production to bring employment and income to this unfavored part of the 
working force is to require that the economy operate under exceptional 
pressure. And even then employment of the kind required may not be 
forthcoming. In the early nineteen-sixties, there was a strenuous debate 
among American economists as to whether unemployment was the result 
of a shortage of demand, and thus curable by an increase in the latter, or 
whether it was primarily to be explained by the unemployability of some 
part of the labor force whatever the level of demand. Reputability was 
strongly on the side of those who argued the crucial role of demand; in 
consequence, they had the better of the argument. But, on the whole, the 
facts have favored the structuralists as they were called. A high level of 
demand is admittedly a condition for a high level of employment. But it is 
not sufficient for full employment. Beyond a certain point, and given the 
shortage of qualified workers that will exist, it is impractical to pull the 
uneducated, the inexperienced and the black workers into the labor force 
and into jobs. - Along with these are a large number of others—women 
heading households, the physically or mentally infirm—who, if the need 
for their product is not very great, should not be in the labor market at all. 

For those who are unemployable, employable only with difficulty or 
who should not be working, the immediate solution is a source of income 
unrelated to production. This has come extensively into discussion under 
various proposals for a guaranteed income or a negative income tax.- The 
principle common to these proposals is provision of a basic income as a 
matter of general right and related in amount to family size but not 
otherwise to need. If the individual cannot find (or does not seek) 
employment, he or she has this income on which to survive. With income 


from employment, part of the payment is withdrawn and above a certain 
level is converted into a payment to the state. (Hence the term negative 
income tax.) To work is always to have more income. The minimum 
income so provided once again reduces the pressure to produce as a 
welfare measure. And since such production is an ineffective and 
unreliable source of income to the workers directly concerned, it 
compensates for the inadequacy of production as an instrument of welfare. 


2 i. The Redress of Balance 

our next task is to find a way of obtaining and then of maintaining a 
balance in the great flow of goods and services with which our wealth each 
year rewards us. Specifically we must find a way to remedy the poverty 
which afflicts us in public services—those in particular that are unrelated 
to industrial need or power—and which is in such increasingly bizarre 
contrast with our affluence in private goods. This is necessary to temper 
and, more hopefully, to eliminate the social disorders which are the 
counterpart of the present imbalance. 

Such balance is a matter of elementary common sense in a country in 
which need is becoming so exiguous that it must be cherished where it 
exists and nurtured where it does not. To create the demand for new 
automobiles, we must contrive elaborate and functionless changes each 
year and then subject the consumer to ruthless psychological pressures to 
persuade him of their importance. Were this process to falter or break 
down, the consequences would be disturbing. In the meantime, there are 
large ready-made needs for schools, hospitals, slum clearance and urban 
redevelopment, sanitation, parks, playgrounds, police and other pressing 
public services. Of these needs, almost no one must be persuaded. They 
exist because, as public officials of all kinds and ranks explain each day 
with practiced skill, the money to provide for them is unavailable. So it has 
come about that we get growth and increased employment along the 
dimension of private goods only at the price of increasingly frantic 
persuasion. We exploit but poorly the opportunity along the dimension of 
public services. The economy is geared to the least urgent set of human 
values. It would be far more secure if it were based on the whole range of 


The problem will not be settled by a resolve to spend more for schools and 
streets and other services and to tax accordingly. Such decisions are made 
every day, and they do not come to grips with the causes of the imbalance. 
These lie much deeper. The most important difference between private and 
public goods and services is a technical one. The first lend themselves to 
being sold to individuals. The second do not. As noted above, in the 


evolution of economic enterprise, the things which could be produced and 
sold for a price were taken over by private producers. Those that could not, 
but which were in the end no less urgent for that reason, remained with the 
state. Bread and steel went naturally to private enterprise, for they could 
readily be produced and marketed by individuals to individuals. Police 
protection, sanitation and sewer systems remained with public authority 
for, on the whole, they could not. Once the decision was taken to make 
education universal and compulsory, it ceased to be a marketable 
commodity. The line between public and private activity, as we view it at 
any given moment, is the product of many forces; tradition, ideological 
preference, social urgency and political convenience all play some part. 
But to a far greater degree than is commonly supposed, functions accrue to 
the state because, as a purely technical matter, there is no alternative to 
public management. 

The goods and services which are marketable at a price have a position 
of elementary strategic advantage in the economy. Their price provides the 
income which commands labor, capital and raw materials for production. 
This is inherent in the productive process. In the absence of social 
intervention, private production will monopolize all resources. Only as 
something is done about it will resources become available for public 
services. In Anglo-Saxon constitutional history, the requirement of an 
affirmative act to divert resources from private to public use was the key 
weapon of parliament in contending for power with the sovereign. The 
king had no—or, more precisely, but few—recurring revenues. Hence, all 
taxes for public purposes had to be specifically voted. Gradually it became 
settled that there must be redress of grievances before supply. Apart from 
the use of the power of the purse as the protector of popular liberty, there 
was much else to be said for the practice. In poor and ill-governed 
societies, private goods meant comfort and life itself. Food, clothing and 
shelter, all technically subject to private purchase and sale, once had an 
urgency greater than any public service with the possible exception of the 
provision of law and order. The burden of proof was on any step that 
diverted resources from the satisfaction of these simple biological 
requirements to the (at the time) almost invariably spendthrift services of 
the state. 

Recurring revenues are now commonplace. The control of the purse is 
still an element in the distribution of power between the legislative and 
executive authorities. But it is only one element in a complex relationship 


and, unlike the situation in England under the Stuarts, the approval of 
expenditures, not the voting of taxes, is the linchpin of the legislature's 
power. Yet a good deal remains unchanged. We still seek to synthesize, on 
behalf of private goods, an urgency that was once provided not by 
Madison Avenue but by the even more effective importunities of hunger 
and cold. And for a very large part of our public activity, revenues are 
relatively static. Although aggregate income increases, many tax systems 
return a comparatively fixed dollar amount. Hence new public needs, or 
even the increase in the requirements for old ones incident on increasing 
population, require affirmative steps to transfer resources to public use. 
There must first be a finding of need. The burden of proof lies with those 
who propose the expenditure. Resources do not automatically accrue to 
public authority for a decision as to how they may best be distributed to 
schools, roads, police, public housing and other claimant ends. We are 
startled by the thought. It would lead to waste. 

But with increasing income, resources do so accrue to the private 
individual. Nor when he buys a new automobile out of increased income is 
he required to prove need. We may assume that many fewer automobiles 
would be purchased than at present were it necessary to make a positive 
case for their purchase. Such a case must be made for schools. 


The solution is a system of taxation which automatically makes a pro rata 
share of increasing income available to public authority for public 
purposes. The task of public authority, like that of private individuals, will 
be to distribute this increase in accordance with relative need. Schools and 
roads will then no longer be at a disadvantage as compared with 
automobiles and television sets in having to prove absolute justification. 

The practical solution would be much eased were the revenues of the 
federal government available for the service of social balance. These, to 
the extent of about four fifths of the total, come from personal and 
corporate income taxes. Subject to some variations, these taxes rise rather 
more than proportionately with increases in private income. Unhappily 
they are presently pre-empted in large measure by the requirements (actual 
or claimed) of national defense and the competition of arms. 

It is worth hoping that the time will come when federal revenues and 


the normal annual increase will not be pre-empted so extensively for 
military purposes. Conventional attitudes hold otherwise; on all prospects 
of mankind, there is a chance for betterment, save those having to do with 
an eventual end, without war, to the arms race. Here the hard cold voice of 
realism warns there is no chance. Perhaps things are not so utterly 

But meanwhile the problem of social balance must be faced. So far as 
the federal government is concerned, it must be accomplished while 
relying primarily on the personal and corporate income taxes. As we shall 
see presently, there are other taxes with a high claim to consideration, but 
there are other units of government with higher claim to their use. As 
usual, the solution is implicit in the alternatives. The test is not that high 
military costs make reductions in other public outlays necessary. Rather, it 
is whether, given these military outlays (which may be regretted), we are 
more in need of the services that improve social balance or the additional 
private goods with which we are more affluently supplied than ever before. 

When the issue is so presented and faced, there can be but one conclusion. 

However, even though the higher urgency of federal expenditures for 
social balance is conceded, there is still the problem of providing the 
revenue. And since it is income taxes that must here be used, the question 
of social balance can easily be lost sight of in the reopened argument over 
equality. The truce will be broken and liberals and conservatives will join 
battle on this issue and forget about the poverty in the public services that 
awaits correction and, as we shall see presently, the poverty of people 
which can only be corrected at increased public cost. All this—schools, 
hospitals, even the scientific research on which increased production 
depends—must wait while we debate the ancient and unresolvable 
question of whether the rich are too rich. 

The only hope—and in the nature of things it rests primarily with 
liberals—is to separate the issue of equality from that of social balance. 
The second is by far the more important question. The fact that a tacit 
truce exists on the issue of inequality is proof of its comparative lack of 
social urgency. In the past, the liberal politician has countered the 
conservative proposal for reduction in top bracket income taxes with the 
proposal that relief be confined to the lower brackets. And he has insisted 
that any necessary tax increase be carried more than proportionately by the 
higher income brackets. The result has been to make him a co-conspirator 


with the conservative in reducing taxes, whatever the cost in social 
balance; and his insistence on making taxes an instrument of greater 
equality has made it difficult or impossible to increase them. Meanwhile, 
the individuals with whom he sympathizes and whom he seeks to favor are 
no longer the tax-ridden poor of Bengal or the First Empire but people 
who would be among the first beneficiaries of the better education, health, 
housing and other services which would be the fruits of improved social 
balance, and they would be the long-run beneficiaries of more nearly 
adequate investment in people. 

The rational liberal, in the future, will resist tax reduction, even that 
which ostensibly favors the poor, if it is at the price of social balance. And, 
for the same reason, he will not hesitate to accept increases that are neutral 
as regards the distribution of income. His classical commitment to greater 
equality can far better be kept by attacking as a separate issue the more 
egregious of the loopholes in the present tax laws. These loopholes— 
preferential treatment of capital gains, the special depletion allowances for 
mineral, including in particular oil, recovery, and many others—are 
strongly in conflict with traditional liberal attitudes, for this is inequality 
sanctioned by the state. There is work enough here for any egalitarian 


While there is much that the federal government must do by way of 
redressing balance, as Chapter 17 has suggested, it is in state and local 
services that the imbalance is most striking. Here, however, the solution— 
though it involves another wrench in liberal attitudes—is most clear. It 
calls for a much expanded use of the sales tax. 2 

So long as social balance is imperfect, there should be no hesitation in 
urging high rates. Coverage should be general on consumer products and 
services. In the affluent society, no sharp distinction can be made between 
luxuries and necessaries. Food and clothing are as difficult as ever to do 
without. But they can be and frequently are among the most opulent of 

The relation of the sales tax to the problem of social balance is 
admirably direct. The community is affluent in privately produced goods. 


It is poor in public services. The obvious solution is to tax the former to 
provide the latter—by making private goods more expensive, public goods 
are made more abundant. Motion pictures, electronic entertainment and 
cigarettes are made more costly so that schools can be more handsomely 
supported. We pay more for soap, detergents and vacuum cleaners in order 
that we may have a cleaner urban environment and less occasion to use 
them. We have more expensive cars and gasoline so that we may have 
more agreeable highways and streets on which to drive them. Food being 
relatively cheap, we tax it in order to have better medical services and 
better health in which to enjoy it. This forthright solution has the further 
advantage that sales taxation can be employed with fair efficiency by 
states and even by cities. It is in the services rendered by these 
governments that the problem of social balance is especially severe. The 
yield of the sales tax increases with increasing production. As wants are 
contrived for private goods, more revenues are provided for public use. 
The general property tax, the principal alternative to the sales tax, is rigid 
and inflexible. Since its rates must ordinarily be raised for additional 
services, including those that are associated with increasing income and 
product, the burden of proving need is especially heavy. This tax is a poor 
servant of social balance. 

During the present century, the use of sales taxation by states and cities 
has been growing. Liberals have ordinarily resisted its use. At a minimum, 
they have viewed it with grave misgiving. This has again made the liberal 
the effective enemy of social balance. The reasons for this opposition 
provide an interesting example of how ideas, as they remain stereotyped in 
face of change, can force those who hold them into roles inconsistent with 
their own professions. The American liberal has been, all things 
considered, the opponent of better schools, better communities, better 
urban communications and indeed even of greater economic stability. 

The effect of a sales tax varies greatly as between a poor and an 
affluent country, and the difference is one not of degree but of kind. Under 
the ancien regime in France, the tax on salt achieved an enduring 
reputation for its oppressiveness, which it retains in parts of India to this 
day. In the United States, a tax on salt, even one that doubled or trebled its 
price, would work no perceptible hardship. It is not that salt is more 
dispensable now than in the day of the gabelle. But where it was then a 
major object of expenditure, it is now an insignificant one. And where the 
price of salt once affected visibly and directly what remained for other use, 


it is now too small to have a noticeable effect. 

As with salt, so with other things. In a family which can buy only 
bread and cloth, a tax on bread and clothing means that children will be 
hungrier and less well clad. In a family which can buy many things, the 
adjustment comes at the margin in spending for gasoline, installment 
payments, the races or the quality of the ceremonial steak. 

Thus does affluence alter the case against sales taxation. It will be 
argued that some people are still very poor. The sales tax, unlike the 
income tax, weighs heavily on the small consumption of such individuals. 
But if the income tax is unavailable or in service of other ends, the only 
alternative is to sacrifice social balance. A poor society rightly adjusts its 
policy to the poor. An affluent society may properly inquire whether, 
instead, it shouldn't remove the poverty. As we shall see in the next 
chapter, moreover, improved social balance is one of the first requisites for 
the elimination of poverty. The modern liberal rallies to protect the poor 
from the taxes which in the next generation, as the result of a higher 
investment in their children, would help eliminate poverty. 


There is another objection to greatly multiplied use of the sales tax which 
is that, unlike the personal and corporate income taxes, it makes no 
positive contribution to economic stability. The latter do so in two 
respects. Falling on the corporations and the well-to-do, they weigh most 
heavily on income that is on its way to be saved rather than on income that 
is on its way to be spent for consumer goods. The investment of saved 
income has long been considered the most mercurial and hence the least 
certain link between the receipt of income and its return to the spending 
stream. The income tax thus taps and ensures spending where this is 
intrinsically the least certain. Income taxes and especially the personal 
income tax have, in addition, their role as built-in stabilizers of the 
economy. As incomes fall, the personal tax, through the mechanism of the 
progressive rates, automatically reduces itself. As a result, and not without 
reason, it has come to be regarded as central to the strategy of economic 

However, it is of the essence of the present argument that other goals 
share in urgency with protection and maximization of total output. One is 


the social balance that is served by sales taxation. Moreover, the principal 
purpose of the measures outlined in the last chapter was to make possible 
the escape from the commitment to maximum production without doing 
damage to individual economic security. 

But social balance also adds to the stability and security of production 
along another dimension, for we have seen that exploitation of the solid 
needs of the public sector of the economy, as distinct from the tenuous and 
expensively synthesized wants for private goods, will almost certainly 
contribute to stability and orderly economic growth. Production will then 
be based on the whole range of human wants, not a part. As such, it will be 
more secure. 

Finally, with better social balance, investment in human resources will 
be kept more nearly abreast of that in material capital. This, we have seen, 
is the touchstone for technological advance. As such, it is a most important 
and possibly the most important factor in economic growth. Such are the 
paradoxes of economic policy. 

The much increased use of the sales tax, as here suggested, is 
obviously not intended as a substitute for the income tax. This has long 
been the fond dream of conservatives. The present intention, which is to 
break the deadlock imposed by the relation of the income tax to equality 
and divert a much increased share of resources to public need, accords 
with the conventional wisdom of neither conservatives nor liberals. 

Nonetheless, it is the latter who will be most reluctant. Apart from the 
ancient commitment to equality, the Keynesian system is, pre-eminently, 
the conventional wisdom of liberals. And here support for the income tax 
is categorical. Keynes did not foresee that the rapid expansion in output 
which was implicit in his ideas would soon bring us to the time when not 
total output but its composition would become the critical matter. Had he 
survived, he would no doubt have been perturbed by the tendency of his 
followers to concentrate their policy on the single goal of increased output. 
He did not lack discrimination. But these followers or some of them will 
almost certainly continue to protect the Keynesian system, with its 
concentration on aggregate demand and output, from ideas which Keynes 
might have been disposed to urge. Such is the fate of anyone who becomes 
a part of the conventional wisdom. 



Given a sufficiency of demand, the responding production of goods in the 
modern economy is almost completely reliable. We have seen in the early 
chapters of this essay why men once had reason to regard the economic 
system as a meager and perilous thing. And we have seen how these ideas 
have persisted after the problem of production was conquered. There will 
be some who will still suggest that to divert more resources to public use 
will be to imperil private production. There is not the slightest ground for 
this fear, and we have seen, in fact, that the risk lies in another direction— 
that our reliance on private goods is by methods that threaten the stability 
of demand, and that social imbalance imperils the prospect for long-run 
economic growth. Still, the fear will be expressed. 

Here is the last advantage of sales taxation as a technique for diverting 
resources to public use. This tax has been recommended for years by the 
most impeccable of conservatives. Such august audiences as the National 
Association of Manufacturers have repeatedly heard and applauded 
speeches reciting its virtues. It has been made clear that it does not damage 
incentives or interfere with production. It is true that the sales tax has been 
given these credentials as an alternative to other taxes, something 
definitely not here urged. But it has received this blessing from those who 
speak with the prestige of producers. As a political point, this is not 


One final observation may be made. There will be question as to what is 
the test of balance—at what point may we conclude that balance has been 
achieved in the satisfaction of private and public needs. The answer is that 
no test can be applied, for none exists. The traditional formulation is that 
the satisfaction returned to the community from a marginal increment of 
resources devoted to public purposes should be equal to the satisfaction of 
the same increment in private employment. These are incommensurate, 
partly because different people are involved, and partly because it makes 
the cardinal error of comparing satisfaction of wants that are 
systematically synthesized as part of an organic process with those that are 


But a precise equilibrium is not very important. For another mark of an 
affluent society is the existence of a considerable margin for error on such 
matters. The present imbalance is clear, as are the forces and ideas which 
give the priority to private as compared with public goods. This being so, 
the direction in which we move to correct matters is utterly plain. We can 
also assume, given the power of the forces that have operated to accord a 
priority to private goods, that the distance to be traversed is considerable. 
When we arrive, the opulence of our private consumption will no longer 
be in contrast with the poverty of our schools, the unloveliness and 
congestion of our cities, our inability to get to work without struggle and 
the social disorder that is associated with imbalance. But the precise point 
of balance will never be defined. This will be of comfort only to those who 
believe that any failure of definition can be made to score decisively 
against a larger idea. 


22. The Position of Poverty 

"the study of the causes of poverty," Alfred Marshall observed at the turn 
of the century, "is the study of the causes of the degradation of a large part 
of mankind." He spoke of contemporary England as well as of the world 
beyond. A vast number of people both in town and country, he noted, had 
insufficient food, clothing and houseroom; they were: "Overworked and 
undertaught, weary and careworn, without quiet and without leisure." The 
chance of their succor, he concluded, gave to economic studies "their chief 
and their highest interest. "- 

No contemporary economist would be likely to make such an 
observation about the United States. Conventional economic discourse 
makes obeisance to the continued existence of some poverty. "We must 
remember that we still have a great many poor people." In the nineteen- 
sixties, poverty promised, for a time, to become a subject of serious 
political concern. Then the Vietnam war came and the concern evaporated 
or was displaced. For economists of conventional mood, the reminders that 
the poor still exist are a useful way of allaying uneasiness about the 
relevance of conventional economic goals. For some people, wants must 
be synthesized. Hence, the importance of the goods to them is not per se 
very high. So much may be conceded. But others are far closer to physical 
need. And hence we must not be cavalier about the urgency of providing 
them with the most for the least. The sales tax may have merit for the 
opulent, but it still bears heavily on the poor. The poor get jobs more easily 
when the economy is expanding. Thus poverty survives in economic 
discourse partly as a buttress to the conventional economic wisdom. 

The privation of which Marshall spoke was, going on to a century ago, 
the common lot at least of all who worked without special skill. As a 
general affliction, it was ended by increased output which, however 
imperfectly it may have been distributed, nevertheless accrued in 
substantial amount to those who worked for a living. The result was to 
reduce poverty from the problem of a majority to that of a minority. It 
ceased to be a general case and became a special case. It is this which has 
put the problem of poverty into its peculiar modern form. 



For poverty does survive. In part, it is a physical matter; those afflicted 
have such limited and insufficient food, such poor clothing, such crowded, 
cold and dirty shelter that life is painful as well as comparatively brief. But 
just as it is far too tempting to say that, in matters of living standards, 
everything is relative, so it is wrong to rest everything on absolutes. People 
are poverty-stricken when their income, even if adequate for survival, falls 
radically behind that of the community. Then they cannot have what the 
larger community regards as the minimum necessary for decency; and they 
cannot wholly escape, therefore, the judgment of the larger community 
that they are indecent. They are degraded for, in the literal sense, they live 
outside the grades or categories which the community regards as 

Since the first edition of this book appeared, and one hopes however 
slightly as a consequence, the character and dimension of this degradation 
have become better understood. There have also been fulsome promises 
that poverty would be eliminated. The performance on these promises has 
been less eloquent. 

The degree of privation depends on the size of the family, the place of 
residence—it will be less with given income in rural areas than in the cities 
—and will, of course, be affected by changes in living costs. One can 
usefully think of deprivation as falling into two broad categories. First, 
there is what may be called case poverty. This one encounters in every 
community, rural or urban, however prosperous that community or the 
times. Case poverty is the poor farm family with the junk-filled yard and 
the dirty children playing in the bare dirt. Or it is the gray-black hovel 
beside the railroad tracks. Or it is the basement dwelling in the alley. 

Case poverty is commonly and properly related to some characteristic 
of the individuals so afflicted. Nearly everyone else has mastered his or 
her environment; this proves that it is not intractable. But some quality 
peculiar to the individual or family involved—mental deficiency, bad 
health, inability to adapt to the discipline of industrial life, uncontrollable 
procreation, alcohol, discrimination involving a very limited minority, 
some educational handicap unrelated to community shortcoming, or 
perhaps a combination of several of these handicaps—has kept these 
individuals from participating in the general well-being. 

Second, there is what may be called insular poverty—that which 
manifests itself as an "island" of poverty. In the island, everyone or nearly 


everyone is poor. Here, evidently, it is not easy to explain matters by 
individual inadequacy. We may mark individuals down as intrinsically 
deficient in social performance; it is not proper or even wise so to 
characterize an entire community. The people of the island have been 
frustrated by some factor common to their environment. 

Case poverty exists. It has also been useful to those who have needed a 
formula for keeping the suffering of others from causing suffering to 
themselves. Since this poverty is the result of the deficiencies, including 
the moral shortcomings, of the persons concerned, it is possible to shift the 
responsibility to them. They are worthless and, as a simple manifestation 
of social justice, they suffer for it. Or, at a somewhat higher level of social 
perception and compassion, it means that the problem of poverty is 
sufficiently solved by private and public charity. This rescues those 
afflicted from the worst consequences of their inadequacy or misfortune; 
no larger social change or reorganization is suggested. Except as it may be 
insufficient in its generosity, the society is not at fault. 

Insular poverty yields to no such formulas. In earlier times, when 
agriculture and extractive industries were the dominant sources of 
livelihood, something could be accomplished by shifting the responsibility 
for low income to a poor natural endowment and thus, in effect, to God. 
The soil was thin and stony, other natural resources absent and hence the 
people were poor. And, since it is the undoubted preference of many to 
remain in the vicinity of the place of their birth, a homing instinct that 
operates for people as well as pigeons, the people remained in the poverty 
which heaven had decreed for them. It is an explanation that is nearly 
devoid of empirical application. Connecticut is very barren and stony and 
incomes are very high. Similarly Wyoming. West Virginia is well watered 
with rich mines and forests and the people are very poor. The South is 
much favored in soil and climate and similarly poor and the very richest 
parts of the South, such as the Mississippi-Yazoo Delta, have long had a 
well-earned reputation for the greatest deprivation. Yet so strong is the 
tendency to associate poverty with natural causes that even individuals of 
some modest intelligence will still be heard, in explanation of insular 
poverty, to say, "It's basically a poor country." "It's a pretty barren region." 

Most modern poverty is insular in character and the islands are the 
rural and urban slums. From the former, mainly in the South, the southern 
Appalachians and Puerto Rico, there has been until recent times a steady 


flow of migrants, some white but more black, to the latter. Grim as life is 
in the urban ghetto, it still offers more hope, income and interest than in 
the rural slum. 

The most important characteristic of insular poverty is forces, common 
to all members of the community, that restrain or prevent participation in 
economic life at going rates of return. These restraints are several. Race, 
which acts to locate people by their color rather than by the proximity to 
employment, is obviously one. So are poor educational facilities. (And this 
effect is further exaggerated when the poorly educated, endemically a drug 
on the labor market, are brought together in dense clusters by the common 
inadequacy of the schools available to blacks and the poor.) So is the 
disintegration of family life in the slum which leaves households in the 
hands of women. Family life itself is in some measure a manifestation of 
affluence. And so, without doubt, is the shared sense of helplessness and 
rejection and the resulting demoralization which is the product of the 
common misfortune. 

The most certain thing about this poverty is that it is not remedied by a 
general advance in income. Case poverty is not remedied because the 
specific individual inadequacy precludes employment and participation in 
the general advance. Insular poverty is not directly alleviated because the 
advance does not remove the specific frustrations of environment to which 
the people of these areas are subject. This is not to say that it is without 
effect. If there are jobs outside the ghetto or away from the rural slum, 
those who are qualified, and not otherwise constrained, can take them and 
escape. If there are no such jobs, none can escape. But it remains that 
advance cannot improve the position of those who, by virtue of self or 
environment, cannot participate. 


With the transition of the very poor from a majority to a comparative 
minority position, there has been a change in their political position. Any 
tendency of a politician to identify him self with those of the lowest estate 
usually brought the reproaches of the well-to-do. Political pandering and 
demagoguery were naturally suspected. But, for the man so reproached, 
there was the compensating advantage of alignment with a large majority. 
Now any politician who speaks for the very poor is speaking for a small 


and generally inarticulate minority. As a result, the modern liberal 
politician regularly aligns him self not with the poverty-ridden members of 
the community but with the far more numerous people who enjoy the far 
more affluent income of (say) the modem trade union member or the 
intellectual. Ambrose Bierce, in The Devil's Dictionary, called poverty "a 
file provided for the teeth of the rats of reform." It is so no longer. Reform 
now concerns itself with the needs of people who are relatively well-to-do 
—whether the comparison be with their own past or with those who are 
really at the bottom of the income ladder. 

In consequence, a notable feature of efforts to help the very poor is 
their absence of any very great political appeal.- Politicians have found it 
possible to be indifferent where they could not be derisory. And very few 
have been under a strong compulsion to support these efforts. 

The concern for inequality and deprivation had vitality only so long as 
the many suffered while a few had much. It did not survive as a decisive 
political issue in a time when the many had much even though others had 
much more. It is our misfortune that when inequality declined as an issue, 
the slate was not left clean. A residual and in some ways rather more 
hopeless problem remained. 


An affluent society that is also both compassionate and rational would, no 
doubt, secure to all who needed it the minimum income essential for 
decency and comfort. The corrupting effect on the human spirit of 
unearned revenue has unquestionably been exaggerated as, indeed, have 
the character-building values of hunger and privation. To secure to each 
family a minimum income, as a normal function of the society, would help 
ensure that the misfortunes of parents, deserved or otherwise, were not 
visited on their children. It would help ensure that poverty was not self- 
perpetuating. Most of the reaction, which no doubt would be adverse, is 
based on obsolete attitudes. When poverty was a majority phenomenon, 
such action could not be afforded. A poor society, as this essay has 
previously shown, had to enforce the rule that the person who did not work 
could not eat. And possibly it was justified in the added cruelty of applying 
the rule to those who could not work or whose efficiency was far below 
par. An affluent society has no similar excuse for such rigor. It can use the 


forthright remedy of providing income for those without. Nothing requires 
such a society to be compassionate. But it no longer has a high 
philosophical justification for callousness. 

The notion that income is a remedy for indigency has a certain 
forthright appeal.- It would also ease the problems of economic 
management by reducing the reliance on production as a source of income. 
The provision of such a basic source of income must henceforth be the 
first and the strategic step in the attack on poverty. 

But it is only one step. In the past, we have suffered from the 
supposition that the only remedy for poverty lies in remedies that allow 
people to look after themselves—to participate in the economy. Nothing 
has better served the conscience of people who wished to avoid 
inconvenient or expensive action than an appeal, on this issue, to Calvinist 
precept—"The only sound way to solve the problem of poverty is to help 
people help themselves." But this does not mean that steps to allow 
participation and to keep poverty from being self-perpetuating are 
unimportant. On the contrary. It requires that the investment in children 
from families presently afflicted be as little below normal as possible. If 
the children of poor families have first-rate schools and school attendance 
is properly enforced; if the children, though badly fed at home, are well 
nourished at school; if the community has sound health services, and the 
physical well-being of the children is vigilantly watched; if there is 
opportunity for advanced education for those who qualify regardless of 
means; and if, especially in the case of urban communities, housing is 
ample and housing standards are enforced, the streets are clean, the laws 
are kept, and recreation is adequate—then there is a chance that the 
children of the very poor will come to maturity without inhibiting 
disadvantage. In the case of insular poverty, this remedy requires that the 
services of the community be assisted from outside. Poverty is self- 
perpetuating partly because the poorest communities are poorest in the 
services which would eliminate it. To eliminate poverty efficiently, we 
must, indeed, invest more than proportionately in the children of the poor 
community. It is there that high-quality schools, strong health services, 
special provision for nutrition and recreation are most needed to 
compensate for the very low investment which families are able to make in 
their own offspring. 

The effect of education and related investment in individuals is to help 


them overcome the restraints that are imposed by their environment. These 
need also to be attacked even more directly—by giving the mobility that is 
associated with plentiful, good and readily available housing, by provision 
of comfortable, efficient and economical mass transport, by making the 
environment pleasant and safe, and by eliminating the special health 
handicaps that afflict the poor. 

Nor is case poverty entirely resistant to such remedies. Much can be 
done to treat those characteristics which cause people to reject or be 
rejected by the modern industrial society. Educational deficiencies can be 
overcome. Mental deficiencies can be treated. Physical handicaps can be 
remedied. The limiting factor is not a lack of knowledge of what can be 
done. Overwhelmingly, it is a shortage of money. 


It will be clear that, to a remarkable extent, the remedy for poverty leads to 
the same requirements as those for social balance. The restraints that 
confine people to the ghetto are those that result from insufficient 
investment in the public sector. And the means to escape from these 
constraints and to break their hold on subsequent generations just 
mentioned—better nutrition and health, better education, more and better 
housing, better mass transport, an environment more conducive to 
effective social participation—all, with rare exceptions, call for massively 
greater investment in the public sector. In recent years, the problems of the 
urban ghetto have been greatly discussed but with little resultant effect. To 
a certain extent, the search for deeper social explanations of its troubles 
has been motivated by the hope that these (together with more police) 
might lead to solutions that would somehow elide the problem of cost. It is 
an idle hope. The modern urban household is an extremely expensive 
thing. We have not yet taken the measure of the resources that must be 
allocated to its public tasks if it is to be agreeable or even tolerable. And 
first among the symptoms of an insufficient allocation is the teeming 
discontent of the modern ghetto. 

A further feature of these remedies is to be observed. Their 
consequence is to allow of participation in the economic life of the larger 
community—to make people and the children of people who are now idle 
productive. This means that they will add to the total output of goods and 


services. We see once again that even by its own terms the present 
preoccupation with the private sector of the economy as compared with the 
whole spectrum of human needs is inefficient. The parallel with 
investment in the supply of trained and educated manpower discussed 
above- will be apparent. 

But increased output of goods is not the main point. Even to the most 
intellectually reluctant reader, it will now be evident that enhanced 
productive efficiency is not the motif of this volume. The very fact that 
increased output offers itself as a by-product of the effort to eliminate 
poverty is one of the reasons. No one would be called upon to write at such 
length on a problem so easily solved as that of increasing production. The 
main point lies elsewhere. Poverty—grim, degrading and ineluctable—is 
not remarkable in India. For relatively few, the fate is otherwise. But in the 
United States, the survival of poverty is remarkable. We ignore it because 
we share with all societies at all times the capacity for not seeing what we 
do not wish to see. Anciently this has enabled the nobleman to enjoy his 
dinner while remaining oblivious to the beggars around his door. In our 
own day, it enables us to travel in comfort through the South Bronx and 
into the lush precincts of midtown Manhattan. But while our failure to 
notice can be explained, it cannot be excused. "Poverty," Pitt exclaimed, 
"is no disgrace but it is damned annoying." In the contemporary United 
States, it is not annoying but it is a disgrace. 


23. Labor, Leisure and the New Class 

in A society of high and increasing affluence, there are three plausible 
tendencies as regards toil. As the production of goods comes to seem less 
urgent, and as individuals are less urgently in need of income for the 
purchase of goods, they will work fewer hours or days in the week. Or 
they will work less hard. Or, as a final possibility, it may be that fewer 
people will work all the time. 

Since the last century, a drastic decline has occurred in the work week. 
In 1850, it is estimated to have averaged just under seventy hours, the 
equivalent of seven ten-hour days a week or roughly six days at from six in 
the morning to six at night.- A century and a quarter later, the normal work 
week was 40.0 hours or five eight-hour days. 2 

This decline reflects a tacit but unmistakable acceptance of the 
declining marginal urgency of goods. There is no other explanation. 
However, such is the hold of production on our minds that this explanation 
is rarely offered. The importance and rewards of leisure are urged, almost 
never the unimportance of goods. Or, since production per hour has been 
increasing as the work week has declined, it is said that we are able to 
reduce the work because more is produced in less time. No mention is 
made of the fact that even more would be produced in more time. Or, 
finally, the decline is related to the feeling that steps must be taken to share 
the available work as productivity per worker rises. This also implies that 
the marginal urgency of production is low or negligible, but again the 
point remains unmade. 

A reduction in the work week is an exceedingly plausible reaction to 
the declining marginal urgency of product. Over the span of man's history, 
although a phenomenal amount of education, persuasion, indoctrination 
and incantation has been devoted to the effort, ordinary people have never 
been fully persuaded that toil is as agreeable as its alternatives. Thus to 
take increased well-being partly in the form of more goods and partly in 
the form of more leisure is unquestionably rational. In addition, the 
institution of overtime enables the worker to go far to adjust work and 
income to his own taste and requirements. It breaks with the barbarous 
uniformity of the weekly wage with its assumption that all families have 
the same tastes, needs and requirements. Few things enlarge the liberty of 


the individual more substantially than that which grants him a measure of 
control over the amount of his income. 

Unfortunately, in the conventional wisdom the reduction in hours has 
emerged as the only legitimate response to increasing affluence. This is at 
least partly because the issue has never been faced in terms of the 
increasing unimportance of goods. Accordingly, though we have attributed 
value to leisure, a ban still lies on other courses which seem to be more 
directly in conflict with established attitudes on productive efficiency. In a 
society rationally concerned with its own happiness, these alternatives 
have a strong claim to consideration. 


The first of these is that work can be made easier and more pleasant. 

The present-day industrial establishment is a great distance removed 
from that of the last century or even fifty years ago. This improvement has 
been the result of a variety of forces—government standards and factory 
inspection; general technological and architectural advance; the fact that 
productivity could often be increased by substituting machine power for 
heavy or repetitive manual labor; the need to compete for a labor force; 
and union intervention to improve working conditions in addition to wages 
and hours. 

However, except where the improvement contributed to increased 
productivity, the effort to make work more pleasant has had to support a 
large burden of proof. It was permissible to seek the elimination of 
hazardous, unsanitary, unhealthful or otherwise objectionable conditions 
of work. The speed-up might be resisted—to a point. But the test was not 
what was agreeable but what was unhealthful or, at a minimum, 
excessively fatiguing. The trend toward increased leisure is not 
reprehensible, but we resist vigorously the notion that someone should 
work less hard while on the job. Here older attitudes are involved. We are 
gravely suspicious of any tendency to expend less than the maximum 
effort, for this has long been a prime economic virtue. 

In strict logic, there is as much to be said for making work pleasant and 
agreeable as for shortening hours. On the whole, it is ostensibly as 
important for a wage earner to have pleasant working conditions as to have 


a pleasant home. To a degree, he can escape the latter but not the former— 
though no doubt the line between an agreeable tempo and what is flagrant 
featherbedding is difficult to draw. Moreover, it is a commonplace of the 
industrial scene that the dreariest and most burdensome tasks, requiring as 
they do a minimum of thought and skill, frequently have the largest 
numbers of takers. The solution to this problem lies, as we shall see 
presently, in drying up the supply of crude manpower at the bottom of the 
ladder. Nonetheless the basic point remains: the case for more leisure is 
not stronger on purely prima facie grounds than the case for making labor¬ 
time itself more agreeable. The test, it is worth repeating, is not the effect 
on productivity. It is not seriously argued that the shorter work week 
increases productivity—that men produce more in fewer hours than they 
would in more. Rather, it is whether fewer hours are always to be preferred 
to more but more pleasant ones. 


Another of the obvious possibilities with increasing affluence is for fewer 
people to work. This tendency has also been operating for many years, 
although in a remarkably diverse form. Since 1890, when one boy in four 
and one girl in ten between the ages of ten and fifteen were gainfully 
employed, large numbers of juveniles have been retired from the labor 
force and their number now is negligible. At the same time, a large number 
of women have been added. In 1890, 19.5 percent of the female population 
ten years and over was in the labor force- and by 1974, this proportion had 
risen to 46 percent.- Since then, yet more. However, this change reflects in 
considerable measure the shift of tasks—food preparation, clothing 
manufacture, even child-rearing—out of the home. Women who 
previously performed them have gone along to other work. The woman 
who takes charge of a day nursery has joined the labor force, as have the 
women whose children she cares for. These changes, one would gather 
from all current pressures to enlarge the economic role of women, will 

For more than a century, the proportion of the male population in the 
labor force has been constant at around 75 percent of those over ten years 
of age. There are a smaller percentage of the very young and of those over 
sixty-five, but this has been offset by the increase in population in the ages 
between twenty and sixty-five where the proportion of workers to the total 


is very high.- 

With diminishing marginal urgency of goods, it is logical that the first 
to be spared should be old and young. We have yet, however, to view this 
tendency consistently and comprehensively. We are able to dispense with 
the labor of those who have reached retiring age because the goods they 
add are at a low order of urgency, whereas a poor society must extract the 
last ounce of labor effort from all. But we have ordinarily subjected those 
who retire to a drastic reduction in income and living standards. 
Obviously, if the retirement can be afforded because the product is no 
longer urgent, a satisfactory—meaning, for most purposes, the customary 
—living standard can be accorded to the retired employee for the same 
reason. Similarly, we have excluded youngsters from the labor market, 
partly on the ground that labor at too early an age is unduly painful and 
injurious to health, and partly to make way for educational opportunity. 
But while we have felt it possible to dispense with the goods that the 
youngsters produce, we have yet to provide them, at least in full and 
satisfactory measure, with the education that their exemption from labor 
was designed to make possible. If we are affluent enough to dispense with 
the product of juvenile labor, it again follows that we are affluent enough 
to provide the education that takes its place. 

In addition to releasing the old and young, it may be that we need not 
use all of the labor force at all times. This possibility was explored in 
Chapter 20. If the marginal urgency of goods is low, then so is the urgency 
of employing the last man or the last million men in the labor force. By 
allowing ourselves such a margin, in turn, we reduce the standards of 
economic performance to a level more nearly consonant with the controls 
available for its management. 

Such a step requires that there be a substitute for production as a 
source of income—and that it be ample. But this accords wholly with the 
logic of the situation. It is also a point which even conservatives, in effect, 
accept. They are always open to the suggestion that unemployment is 
better than inflation. This means that they do not worry about the output so 
lost. So they cannot be too seriously perturbed by providing people who do 
not produce with income. If we do not miss what these non-producers do 
not make when they are unemployed, we will not miss what they eat and 
wear and otherwise need for something approximating their accustomed 
standard of living. 



However, the greatest prospect that we face—indeed what must now be 
counted one of the central economic goals of our society—is to eliminate 
toil as a required economic institution. This is not a Utopian vision. We are 
already well on the way. Only an extraordinarily elaborate exercise in 
social camouflage has kept us from seeing what has been happening. 

Nearly all societies at nearly all times have had a leisure class—a class 
of persons who were exempt from toil. In modern times and especially in 
the United States, the leisure class, at least as an easily identifiable 
phenomenon, has disappeared. To be idle is no longer considered 
rewarding or even entirely respectable. 

But we have barely noticed that the leisure class has been replaced by 
another and much larger class to which work has none of the older 
co nn otation of pain, fatigue or other mental or physical discomfort. And 
the continuing revolution in job quality being wrought by the computer is 
accelerating its growth. We have failed to appreciate the emergence of this 
New Class, as it may be called, largely as the result of one of the oldest 
and most effective obfuscations in the field of social science. This is the 
effort to assert that all work—physical, mental, artistic or managerial—is 
essentially the same. 

This effort to proclaim the grand homogeneity of work has 
commanded, for different reasons, the support of remarkably numerous 
and diverse groups. To economists, it has seemed a harmless and, indeed, 
an indispensable simplification. It has enabled them to deal 
homogeneously with all of the different kinds of productive effort and to 
elaborate a general theory of wages applying to all who receive an income 
for services. Doubts have arisen from time to time, but they have been 
suppressed or considered to concern special cases.- The identity of all 
classes of labor is one thing on which capitalist and Communist doctrine 
wholly agree. The president of the corporation is pleased to think that his 
handsomely appointed, comfortably upholstered office is the scene of the 
same kind of toil as the assembly line and that only the greater demands in 
talent and intensity justify his wage differential. The Communist 
officeholder could not afford to have it supposed that his labor differed in 
any significant respect from that of the comrade at the lathe or on the 
collective farm with whom he was ideologically one. In both societies, it 


served the democratic conscience of the more favored groups to identify 
themselves with those who do hard physical labor. A lurking sense of guilt 
over a more pleasant, agreeable and remunerative life can often be 
assuaged by the observation, "I am a worker too," or, more audaciously, by 
the statement that "mental labor is far more taxing than physical labor." 
Since the man who does physical labor is intellectually disqualified from 
comparing his toil with that of the brainworker, the proposition, though 
outrageous, is uniquely unassailable. 

For, in fact, the differences in what labor means to different people 
could not be greater. For some, and probably a majority, it remains a stint 
to be performed. It may be preferable, especially in the context of social 
attitudes toward production, to doing nothing. Nevertheless, it is fatiguing 
or monotonous or, at a minimum, a source of no particular pleasure. The 
reward rests not in the task but in the pay. 

For others, work, as it continues to be called, is an entirely different 
matter. It is taken for granted that it will be enjoyable. If it is not, this is a 
legitimate source of dissatisfaction, even frustration. No one regards it as 
remarkable that the advertising man, tycoon, poet or professor who 
suddenly finds his work unrewarding should seek the counsel of a 
psychiatrist. One insults the business executive or the scientist by 
suggesting that his principal motivation in life is the pay he receives. Pay 
is not unimportant. Among other things, it is a prime index of prestige. 
Prestige—the respect, regard and esteem of others—is in turn one of the 
more important sources of satisfaction associated with this kind of work. 
But, in general, those who do this kind of work expect to contribute their 
best regardless of compensation. - They would be disturbed by any 
suggestion to the contrary. 

Such is the labor of the New Class. No aristocrat ever contemplated the 
loss of feudal privileges with more sorrow than a member of this class 
would regard his descent into ordinary labor where the reward was only 
the pay. From time to time, schoolteachers leave their posts for 
substantially higher paid factory work. The action makes headlines 
because it represents an unprecedented desertion of an occupation which is 
assumed to confer the dignity of the New Class.- The college professor, 
who is more securely a member of the New Class than the schoolteacher, 
would never contemplate such a change even as an exercise in eccentricity 
and no matter how inadequate he may consider his income. - 


In keeping with all past class behavior, the New Class seeks 
energetically to perpetuate itself. Offspring are not expected to plan their 
lives in order to make a large amount of money. (Those who go into 
business are something of an exception at least partly because in come, in 
business, is uniquely an index of prestige.) From their earliest years, the 
children of the New Class are carefully indoctrinated in the importance of 
finding an occupation from which they will derive satisfaction—one which 
will involve not toil but enjoyment. One of the principal sources of sorrow 
and frustration in the New Class is the son who fails to make the grade— 
who drops down into some tedious and unrewarding occupation. The 
individual who meets with this misfortune—the son of the surgeon who 
becomes a garage hand—is regarded by the community with pity not 
unmixed with horror. But the New Class has considerable protective 
powers. The son of the surgeon rarely does become a garage hand. 
However inadequate, he can usually manage to survive, perhaps somewhat 
exiguously, on the edge of his caste. And even if, as a salesman or an 
investment counselor, he finds little pleasure in his work, he will be 
expected to assert the contrary in order to affirm his membership in the 
New Class. 


The New Class is not exclusive. While virtually no one leaves it, 
thousands join it every year. Overwhelmingly, the qualification is 
education.— Any individual whose adolescent situation is such that 
sufficient time and money are invested in his preparation, and who has at 
least the talents to carry him through the formal academic routine, can be a 
member. There is a hierarchy within the class. The son of the factory 
worker who becomes an electrical engineer is on the lower edge; his son 
who does graduate work and becomes a university physicist moves to the 
higher echelons; but opportunity for education is, in either case, the open 

There can be little question that in the last one hundred and fifty years, 
and even in the last few decades, the New Class has increased enormously 
in size. In early nineteenth-century England or the United States, excluding 
the leisure class and considering the New Class as a group that lived on 
what it has carefully called earned income, it consisted only of a handful of 
educators and clerics, with, in addition, a trifling number of writers, 


journalists and artists. In the United States of the eighteen-fifties, it could 
not have numbered more than a few thousand individuals. Now the 
number whose primary identification is with their job, rather than the 
income it returns, is in the millions. 

Some of the attractiveness of membership in the New Class, to be sure, 
derives from a vicarious feeling of superiority—another manifestation of 
class attitudes. However, membership in the class unquestionably has 
other and more important rewards. Exemption from manual toil; escape 
from boredom and confining and severe routine; the chance to spend one's 
life in clean and physically comfortable surroundings; and some 
opportunity for applying one's thoughts to the day's work are regarded as 
unimportant only by those who take them completely for granted. For 
these reasons, it has been possible to expand the New Class greatly 
without visibly reducing its attractiveness. 

This being so, there is every reason to conclude that the further and 
rapid expansion of this class should be a major, and perhaps next to 
peaceful survival itself, the major social goal of the society. Since 
education is the operative factor in expanding the class, investment in 
education, assessed qualitatively as well as quantitatively, becomes very 
close to being the basic index of social progress. It enables people to 
realize a dominant aspiration. It is an internally consistent course of 

Recent experience has shown that the demand for individuals in the 
occupations generally identified with the New Class increases much more 
proportionately with increased income and well-being. Were the expansion 
of the New Class a deliberate objective of the society, this, with its 
emphasis on education and its ultimate effect on intellectual, literary, 
cultural and artistic demands, would greatly broaden the opportunities for 
membership. At the same time, the shrinking in the number of those who 
engage in work qua work is something to be regarded not alone with 
equanimity but with positive approval. One of the inevitable outlets for the 
intellectual energies and inventiveness of the New Class is, in fact, in 
finding substitutes for routine and repetitive manual labor. To the extent 
that such labor is made scarce and more expensive, this tendency will, of 
course, be accelerated. This is a highly plausible social goal. 

It is a measure of how little we need worry about the danger from 
reducing the number of people engaged in work qua work that, as matters 


now stand, our concern is not that we will have too few available for toil 
but too many. We worry lest such technical advances as automation, an 
already realized dividend of the expansion of the New Class, will proceed 
so rapidly as to leave a surplus of those who still merely work. This, 
indeed, is probably the greater danger. 


I venture to suggest that the unprofessional reader will find rather 
reasonable and rational the ideas here offered. Why should men struggle to 
maximize income when the price is many dull and dark hours of labor? 
Why especially should they do so as goods become more plentiful and less 
urgent? Why should they not seek instead to maximize the rewards of all 
the hours of their days? And since this is the plain and obvious aspiration 
of a great and growing number of the most perceptive people, why should 
it not be the central goal of the society? And now to complete the case, we 
have a design for progress. It is education or, more broadly, investment in 
human as distinct from material capital. 

But in the more sophisticated levels of the conventional wisdom, 
including, regrettably the more stolid and reputable of the professional 
economists, any such goal will seem exceedingly undesirable. The 
production of material goods, urgent or otherwise, is the accepted measure 
of our progress. Investment in material capital is our basic engine of such 
progress. Both this product and the means for increasing it are measurable 
and tangible. What is measurable is better. To talk of transferring 
increasing numbers of people from lives spent mostly in classical toil to 
lives which, for the most part, are spent pleasantly has less quantitative 
precision. Since investment in individuals, unlike investment in a blast 
furnace, provides a product that can be neither seen nor valued, it is 
inferior. And here the conventional wisdom unleashes its epithet of last 
resort. Since these achievements are not easily measured as a goal, they are 
"fuzzy." What economics finds inconvenient, it invariably so attacks and it 
is widely deemed to be a fatal condemnation. The precise, to be sure, is 
usually the old and familiar. Because it is old and familiar, it has been 
defined and measured. Thus does insistence on precision become another 
of the tautological devices by which the conventional wisdom protects 
itself. Nor should one doubt its power. 


Yet anyone who finds this analysis and these proposals sensible should 
not be entirely discouraged. We are here in one of the contexts where 
circumstance has marched far beyond the conventional wisdom. We have 
seen how general are the efforts to join the New Class and how rapid is its 
expansion. We are not here establishing a new economic and social goal 
but identifying one that is already widely if but tacitly accepted. In this 
situation, the conventional wisdom cannot resist indefinitely. The 
economist of impeccable credentials in the conventional wisdom, who 
believes that there is no goal in life of comparable urgency with the 
maximization of total and individual real income, would never think of 
applying such a standard to him self. In his own life, he is an exponent of 
all the aspirations of the New Class. He educates and indoctrinates his own 
children with but one thing in mind. It is not that they should maximize 
their income. This is abhorrent. He wants above all that they will have an 
occupation that is interesting and rewarding. On this, he hopes, indeed, 
that they will take their learned parent as their model. 


24. On Security and Survival 

in our society, the increased production of goods—privately produced 
goods—is, as we have seen, a basic measure of social achievement. This is 
partly the result of the great continuity of ideas which links the present 
with a world in which production indeed meant life. Partly, it is a matter of 
vested interest. Partly, it is a product of the elaborate obscurantism of the 
modern theory of consumer need. And partly, we have seen, the 
preoccupation with production is forced quite genuinely upon us by the 
tight nexus between production and economic security. However, it is a 
reasonable assumption that most people pressed to explain our concern for 
production—a pressure that is not often exerted—would be content to 
suggest that it serves the happiness of most men and women. That is 

The pursuit of happiness is admirable as a social goal. But the notion 
of happiness lacks philosophical exactitude; there is agreement neither on 
its substance nor its source. We know that it is "a profound instinctive 
union with the stream of life,"- but we do not know what is united. As just 
noted, precision in scholarly discourse not only serves as an aid in the 
communication of ideas, but it acts to eliminate unwelcome currents of 
thought, for these can almost invariably be dismissed as imprecise. To 
have argued simply that our present preoccupation with the production of 
goods does not best aid the pursuit of happiness would have got nowhere. 
The concepts to which one would have been committed would have been 
far too vague. 

Any direct onslaught on the identification of goods with happiness 
would have had another drawback. Scholarly discourse, like bullfighting 
and the classical ballet, has its deeper rules and they must be respected. In 
this arena, nothing counts so heavily against a man as to be found 
attacking the values of the public at large and seeking to substitute his 
own. Technically, his crime is arrogance. Actually, it is ignorance of the 
rules. In any case, he is automatically removed from the game. In the past, 
this has been a common error of those who have speculated on the sanctity 
of present economic goals—those who have sought to score against 
materialism and philistinism. They have advanced their own view of what 
adds to human happiness. For this, they could easily be accused of 
substituting for the crude economic goals of the people at large the more 


sensitive and refined but irrelevant goals of their own. The accusation is 

The reader will now appreciate the care with which the defenses 
against such an attack have been prepared. The question of happiness and 
what adds to it has been evaded, for indeed only mathematicians and a few 
others are required to solve problems that can as sensibly be sidestepped. 
Instead, the present argument has been directed to seeing how extensively 
our present preoccupations, most of all that with the production of goods, 
are compelled by tradition and by myth. Released from these compulsions, 
we become free for the first time to survey our other opportunities. These 
at least have a plausible relation to happiness. But it will remain with the 
reader, and (since many of the opportunities can be served only by action 
of the state) one hopes with democratic process, to reconcile these 
opportunities with his or her own sense of what makes life better. 


A society has one higher task than to consider its goals, to reflect on its 
pursuit of happiness and harmony and its success in expelling pain, 
tension, sorrow and the ubiquitous curse of ignorance. It must also, so far 
as this may be possible, ensure its own survival. 

Once, in the not distant past, there was a simplistic association of 
security with an expanding economy—with a "healthy" increase in the 
production of private consumer goods. This is no longer believed. As 
noted, ideas, along with the ability of the former Soviet Union to extract 
awesome space accomplishments from a far less productive economy, 
joined to defeat this error and now it is hard to remember that we once 
believed such nonsense. But a dangerous, indeed an infinitely more 
dangerous, association of production with military policy still exists. The 
basic stabilization apparatus of the modern economy consists in a large 
public sector sustained by a large volume of taxation, which, being 
progressive, increases more than in proportion with increases in production 
and income, and releases income for private use when the rate of 
expansion is slower. Large expenditures which justify this taxation and 
thus justify this regulatory process are for military or related purposes. 
Economists have been quick to argue that other public expenditures would 
serve. But the fact cannot be eluded; as matters now stand, the stability of 


production depends on a large volume of military expenditures, quite a few 
of them for weapons thoughtfully designed to destroy all life. 

Additionally, the weapons culture which underlies the macroeconomic 
stabilization of the economy also plays a deeply functional role in 
underwriting technology. The notion that security depends on winning a 
race with the Soviet Union for increased military production has been 
abandoned; the same cannot be said for the belief that it depends on 
winning a competition in technological innovation. Or rather, though the 
race is recognized as having no rational relation to security, the 
commitment to it has been nowise lessened. And one reason is that the 
race has, in fact, a deeply organic relation to economic performance. A 
consumer goods economy is limited in the resources it can allocate to 
research and development. The weapons industry sustains such effort on a 
vastly greater scale. This is interesting to the participant producers for its 
own sake. It also finances development with application to the consumer 
goods sector—the development of air transport and computer technology. 
And it is also a cover by which the cost of research and development for 
civilian purposes which is too expensive or too risky to be afforded by 
private firms can, on occasion, be conducted at public cost. Were we 
deeply concerned about survival, we would question the wisdom of these 
arrangements and we would work relentlessly to persuade as to their 
danger. But if economic performance is our primary concern—if 
production qua production is the thing that counts—then survival naturally 
takes second place. And so it does. Only as we get matters into better 
perspective will our priorities become more consistent with life itself. 2 

There are other, if lesser, problems which our present preoccupation 
with production leaves unsolved. There remain vast millions of hungry and 
discontented people in the world. Without the promise of relief from that 
hunger and privation, disorder is inevitable. The promise of relief requires 
that we have available or usable resources. If such is the nature of our 
system that we have production only because we first create the wants that 
require it, we will have few resources to spare. We will be rich but never 
quite rich enough to spare anything much for the poor—including our 
own. We shan't present a very enchanting picture to the world or even to 
ourselves. If we understand that our society creates the wants that it 
satisfies, we may do better. 

Even when the weapons extravaganza ends, as it must be made to end, 


the scientific frontier will remain. Either as an aspect of international 
competition, or in pursuit of the esteem and satisfaction which go with 
discovery, we shall want to seek to cross it and be in on the crossing. In the 
field of consumer satisfaction, as we should by now agree, there is little on 
which one can fault the American performance. But this is not all and, as 
we should now, one hopes also agree, an economy that is preoccupied 
however brilliantly with the production of private consumer products is 
supremely ill fitted for many of these frontier tasks. Under the best of 
circumstances, its research will be related to these products rather than to 
knowledge. The conventional wisdom will provide impressive arguments 
to the contrary. No one should be fooled. 

And not only does a great part of modern scientific work lie outside the 
scope of the market and private enterprise but so does a large area of 
application and development. Private enterprise did not get us atomic 
energy. Though no one doubts the vigor with which General Motors 
addresses itself to travel on highways within the United States, it has little 
interest in travel through space. 

As matters now stand, we have few civilian arrangements that are by 
central design and purpose directed to large-scale participation in modern 
scientific and technological progress and its large-scale application in 
advance of knowledge that these will be commercially feasible. Much has 
been accomplished by research and development not immediately subject 
to commercial criteria under the inspiration of military need. This has done 
more to save us from the partial technological stagnation that is inherent in 
a consumer goods economy than we imagine. But this is a hideously 
inefficient way of subsidizing general scientific and technical 
development, as nearly all scientists agree. And it has the further effect of 
associating great and exciting scientific advances with an atmosphere of 
fear and even terror. 


Nor is this all. The day will not soon come when the problems of either the 
world or our own policy are solved. Since we do not know the shape of the 
problems, we do not know the requirements for solution. But one thing is 
tolerably certain. Whether the problem be that of a burgeoning population 
and of space in which to live with peace and grace, or whether it be the 


depletion of the materials which nature has stocked in the earth's crust and 
which have been drawn upon more heavily in this century than in all 
previous time together, or whether it be that of occupying minds no longer 
committed to the stockpiling of consumer goods, the basic demand on 
America will be on its resources of intelligence and education. The test 
will be less the effectiveness of our material investment than the 
effectiveness of our investment in people. We live in a day of grandiose 
generalization. This one can be made with confidence. 

Education, no less than national defense or foreign assistance, is in the 
public domain. It is subject to the impediments to resource allocation 
between private and public use. So, once again, our hope for survival, 
security and contentment returns us to the problem of guiding resources to 
the most urgent ends. 

To furnish a barren room is one thing. To continue to crowd in 
furniture until the foundation buckles is quite another. To have failed to 
solve the problem of producing goods would have been to continue man in 
his oldest and most grievous misfortune. But to fail to see that we have 
solved it, and to fail to proceed thence to the next tasks, would be fully as 



reviewing one's writing after much time has elapsed is not an 
ungratifying exercise. One is a sympathetic critic of one's own work; there 
is always more pleasure to be gained from what has been shown to be right 
than there is regret over what has proved to be wrong. I remain convinced 
that, as the foregoing chapters have held, affluence has a profound, even 
decisive effect on economic behavior and thus on the way we should 
regard the economy. Born in a world of poverty and privation, economics 
as a subject matter has been slow to recognize the difference that is made 
by wealth. Contemplating this book in this context, I am as persuaded now 
as in the days of its first writing of the importance of the task it undertakes 
and also, in the field of ideas, of the magnitude of that task. The basic 
shortcoming of economics is its tender ’ lot to original or motivated error 
but to traditional unmotivated obsolescence. Nothing, the rise of the 
modern great corporation perhaps excepted, has so contributed to the 
obsolescence of what has been called the received economics as the spread 
of affluence. This the preceding pages strongly argue; this, I think, the 
subsequent experience attests. 

The effect of affluence goes beyond economics to influence politics 
and political behavior and further on to influence our view—or our lack of 
view—of the world at large. Not all of this did I foresee, but again the 
basic point remains: increasing and more general affluence has changed 
political and social attitudes and behavior; this is something that those 
concerned with both political theory and practical politics will ignore 
perhaps to their personal cost and certainly to the loss of their capacity for 
advancing the common good. There is in economics, as also in political 
theory, a marked tendency to indignation when someone suggests that 
change has altered the substance of our economic and political life. The 
good scholar stays with the accepted and the known; only the slightly 
frivolous individual, the person escaping the rigors and hardships of 
conventional thought, goes on to the new and untried. But let no one be in 
doubt: where the world of affluence is concerned, reality and truth lie not 
with what was believed in the past but with what is compelled by the 

There are, I think, two major effects of affluence that I would now 


wish especially to emphasize. There is first the danger that, with affluence, 
we will settle into a comfortable disregard for those excluded from its 
benefits and its culture. And there is the likelihood that, as so often in the 
past, we will develop a doctrine to justify the neglect. Indeed, we are 
already well on the way to doing so. I pass over the oft-mentioned 
formulation that the rich have not been working because of too little 
income and the poor have been idling because of too much. That is social 
perception and justification at an unduly primitive level. More influential 
is the argument that stresses the inefficiency of government and sees its 
costs and taxes (those for defense apart) as a threat to liberty. From this 
comes the philosophical basis for resistance to government help to the 
poor, for it is from the state alone that effective action against poverty 
must come. Such doctrine, once again, allows the affluent to relax not with 
the ostentatious cruelty of Social Darwinism but nonetheless in the 
contented belief that no ameliorative action is possible or socially wise. 

The second effect of affluence is that out of great well-being come the 
resources for the production of weapons of ever increasing danger, ever 
greater capacity for devastation. And while this, one hopes, brings 
reflection on the part of some of the fortunate—of those who see that in 
the democracy of nuclear destruction they will die with the rest—it also 
brings attitudes that cause others to accept this threat. When the present is 
good, thought is diverted from the future. Our well-being, it is imagined, is 
an object of envy by the less fortunate and above all by those whose 
economic system denies possession of the property and resulting income 
which we so greatly enjoy. So we arm ourselves out of our affluence to 
protect our good fortune. The foregoing chapters are not indifferent to the 
dark cloud cast by our promiscuous commitment to weaponry and the 
arms race. But I am far more persuaded now than when I first wrote of the 
depth of the danger and the urgency of solution. 

So I leave the reader with two pleas. One is to resist the tendency of 
recent times, which is, as so often before, to find social doctrine that limits 
or rejects the social claims of the poor. Instead let us put elimination of 
poverty in the affluent society strongly, even centrally, on the social and 
political agenda. And let us protect our affluence from those who, in the 
name of defending it, would leave the planet only with its ashes. The 
affluent society is not without flaws. But it is well worth saving from its 
own adverse or destructive tendencies. 



Abramovitr, Moses, toj n 
Acceptability, 7-8; conventional wis¬ 
dom and, 7-u; of ideas, 7 
Advertising, 117 n, 205; auto industry, 
205; debt creation and, 145; depend¬ 
ence effect and, 127-129; diminishing 
returns of, 147; expenditures for, 117-, 
investment and, 205; privately pro¬ 
duced goods and, 112; production 
and, 223; social balance and, 194-195; 
virtuosity in, 147-148; wants and, 126, 

Affluence, 223; conventional wisdom 
and, 244; effect of increasing, 119; em¬ 
ployment and, 217; in Europe, 1-2; 
family life as manifestation of, 238; 
full employment and, 217-218; ideas 
and, 1-2; labor and, 243-248; prob¬ 
lems of, 209-216; sales tax and, 230; 
Social Darwinism and, 52; wants 
and, 129. See also Wealth 
Affluent society, the, 1-5; consumer be¬ 
havior and, 118; education and, 208; 
elimination of toil, 248; minimum in¬ 
come, 239-240; New Class and, 252- 
253; poverty in, 239-241; price stabil¬ 
ity and, 175; sales tax and, 228-232; 
social balance and, 228-232; symbols 
of prestige in, 126 

Aggregate demand for goods, means of 
regulating, 175; tax cuts and, 179 
Agriculture, Appalachian region, 90, 

237; bankrupt farmers, 215; compcti- 


tion in, 157; farm price supports, 92; 
hazards inherent in, 92; income, 89, 
163; inflation and, 137; innovations 
in, 103; monetary policy and, >76; 
poverty and, 237; research in, 104; 
surpluses, 211. See also Farmers; Farm 
support prices 
Alcott, William A., 215 n 
American Capitalism: The Concept of 
Countervailing Power, 34 n, 

37 n, 103 n, 152 n, 205 n 
American Economic Review, 106 n 
American Federation of Labor-Con¬ 
gress of Industrial Organizations 
(AFL-CIO), 7 
Antitrust laws, 78,108 
Appalachia, 90,237 
Arkwright, Richard, 201 
Asia, 23 

Atomic energy, 239 
Australia, 29 

Automobile industry advertising, 205 
Automobile installment credit, 146-150, 

Bangladesh, 29 

Bank of England, 166-167 

Beckcrman, W„ 114 

Beecher, Henry Ward, 30 

Bellamy, Edward, 44 

Beveridge, William Henry (Lord), 13 

Bierce, Ambrose. 238 

Blacks, 220,237 

Btough, Roger M„ 79 n 
Bourneuf, Alice, 70 n 
Brown, E. H. Phelps, 19 n 
Browning, Robert, 140 
Budget, balanced, 14-15; conventional 
wisdom and, 13-15; cutting of, 179 
Burns, Arthur F., 198 
Business, see Businessman; Income; 
Inflation; Investment; Monetary 

Business cyde, 37-40,139,181-182 
Businessman: conventional wisdom 
and, 10-12; as economic force, 7,84; 
hierarchical tole of, 133; hostility to 
government, 134-135; intelligentsia 
and, 134-136,141-142; output and, 
132-142; prestige of, 140; production 
and, 99,132-142; public officials and, 
133,141; public relations industry 
and, 140; social security and, 86, 91- 
92. See also Income; Inflation; Invest¬ 
ment; Monetary policy; Production 


Gairnes, J. F., 21 n 
Canada, 90 

Capacity use of plant, 158; labor force 
and, 169 n, 180; production and, 167, 

Capital: efficient use of, 107-108; em¬ 
ployment and, jo; free flow of, 166, 
201; improvement in, 201-202; ine¬ 
fficient use of, 106; inequality and, 

68; international movement of, 166- 
167; material, 202,231-232,254; 
monetary policy and, 177; monopoly 
and, 105; production and, 102,105,107 
Capital formation: definition of, 200; in 
England, 68; as index of economic 
growth, 104-105; inequality and, 67- 
69; investment and, 200; Marx on, 

56.57; in Norway, 68; in peacetime, 

112; production and, 104-108 
Capitalism: conventional wisdom and, 
14: Marx on, 55-61,93; wages and, 

Carey, Henry Charles, 41-42,47 
Carlyle, Thomas, 23 
Carnegie, Andrew, 32 
Carney, Stephen133 
Central tradition, see Economics 
Charity, 49,236 

Chinese Cultural Revolution, 256 n 
Churchill, Winston, 64 n 
Civil Wat, 18,32 37 
Clark, John Bates, 118 
Classical tradition, 21 n 
Clemence, Richard V.,38 n 
Coefficients. 188 
Cominager, Henry Steele, 46 n 
Commons, lohn R„ 44 n 
Communism, 66-67,249 
Competition, 34-37; in agriculture, 157; 
the corporation and, 52; economic 
insecurity and, 81,83, 88; economic 
security and, 81,83,87, inflation and, 
159-160; as an instrument of change, 
34; in the labor force, 247, model for, 
34-37; new products and services, 

194; social balance and, 193-195; So¬ 
cial Darwinism and, 47-53 
Competitive economy; insecurity of. 12, 
83.88; vicissitudes of, 85-90 
Competitive model, insecurity of, 65, 
Connecticut, 237 

Conservatives; conventional wisdom 
and, 8-9,13; economic security and, 
82,88; fiscal policy and, 180; inequal¬ 
ity and, 70, 195; monetary policy and, 
177; production and, 138; sales tax 
and, 233; social balance and, 195,233; 
taxes and, 70,227,232,233 

Consumer behavior, the affluent soci¬ 
ety and, 119 

Consumer borrowing. 146-147.169,170; 
dangers inherent in, 150,151; restric¬ 
tion of, 173 

Consumer credit, 150-153; expansion 
of, 149; installments and, 171; mone¬ 
tary policy and, 171 


Consumer debt, 145-147; consumption 
and, 146; creation of, 145-146,151; in¬ 
crease in, 145-147,151: liquidation of, 
151; statistics, 146-147 
Consumer demand, 114-123,151; con¬ 
ventional wisdom and, 124-125; debt 
creation and, 145-147,151; diminish¬ 
ing marginal utility and, 119-123; eco¬ 
nomics and, 115-123,130; goods and, 
114,120-123; income and, 121,122 n; 
inflation and, 157-161,164-165; inter¬ 
est rate and, 171,173; prices and, 116, 
157-161; production and, 114-117,123, 
210; theory of, 117-123,144; wants 
and, 117-120 

Consumer durables, 151 n-152 n; re¬ 
straints of financing, 154 
Consumer need, 114-117 
Consumer saving, 146 
Consumer spending, 150,170,174; reli¬ 
ability of, 175; restraints on financing, 

Consumer taste, 84,121,214; production 
and, 102 

Consumption, balance in, 188-189,190; 
consumer debt and, 146; income 
and, 143 n; increase in, 146; produc¬ 
tion and, 104-105; social balance in, 

Conventional wisdom, 6-17,209-210; 
acceptability and, 7-it; affluence and, 
244; balanced budget and, 13-15; the 
businessman and, 10-12; capitalism 
and, 14; conservatives and, 8-9,12; 
consumer demand and, 124-115; con¬ 
trols and, 182-184; definition of, 8; de 
pcndencc effect and, 124; depression 
and, 155; economic security and, 90, 
94; England, 8,12,13; events and, 6-8, 
11-16; federal appropriations and, 

196; federal Reserve System and, 167; 
inequality and, 67,69,79; inflation 
and, 154,155,164.230; inventions and, 
201-202; investment and, 201-202, 
206; Keynes and, 15.123,139.232; lib¬ 
erals and, 8-9,12; the New Class and, 
254; politics and, 8-u; price stability 
and, 179; production and, 103,108, 
no-112,144,148 n; public services 
and. 110-112; security and, 90,94: so¬ 
cial balance and, 193-194; socialism 
and, us taxes and, 226 
Corporation executives, 84-85 
Corporations competition and, 52; eco¬ 
nomic security and, 86-87,89; 
efficiency of, 212-214; recession and, 

Couzcns, James, 89 


Darwin, Charles, 48 
Debt creation, 143-153; advertising and, 
145-146; consumer demand and, 145- 
147,151; economics and, 148-149; 
emulation and. 145; taxes and, 151; un¬ 
employment and, 150; wants and, 
145 - 147 . 14 * 

Declining community, 211-116 
Demand: differential movements in, 

160 n; fiscal policy and. 177,184; in¬ 
crease in, 159—161; prices and, 159; 
taxes and, 179-180 

Dependence effect, 124-131; advertising 
and, 127-129; conventional wisdom 
and, 124; definition of, 129; goods 
and, 127-1311 production and, 124- 
131; salesmanship and, 127-129; wants 
and, 124-131 
Depew, Chauncey, 50 
Depression, 14-15,37-40,75; conven¬ 
tional wisdom and, 155; economic se¬ 
curity and, 89-96; inflation and, 155, 
156; Keynes on, 155; Marx on, 38,57- 
58,61,65; monetary policy and, 176; 
output and, 137-139; poverty and, 39; 
production and, 105,112; services 
and, 198; taxes and, 179 
Destutt de Tracy, A., 56 
Dewhurst, J. Frederic, 94 n, 243 n 
Diminishing marginal utility, 118-123 
Dorfman, Joseph, 42 n 

Douglas, Lewis W., 15 
Duesenberry, James S., 126 

East India Company, 24 
Economic Indicators, 95 n 
Economic insecurity, 6$, *1-82; compe¬ 
tition and, 81,83,88; elimination of, 
83; increased production and, 94-98; 
inherent, 82-83; microeconomic 
measures to reduce, 86, 96; minimi¬ 
zation of, 96 

Economic Journal, The, 114 n 
Economics: American tradition in, 41- 
54; the business cycle, 37-40,137,181- 
182; central tradition in, 21- 26,30,41- 
43,56,62, U8; consumer demand 
and, 115-123,130; debt creation and, 
148; despair and, 18-28; formation of 
ideas, 20; history of, 18 ■ 65; inequality 
and, 23,24; output and, 19-21; pov¬ 
erty and, 20,23-24,29,42,47- 48; pri¬ 
vation and, 23, 64-65; production 
and, 114-115; wealth and, 18,20,21,25, 

Economics and the Public Purpose, 72 n, 
173 n, 192 n, 202 n, 258 n 


Economic security, 81-98, 255-260; 
competition and, 81,83, 86; conserva¬ 
tives and, 82,97; consumer taste and, 
84; conventional wisdom and, 91,90, 
94; the corporation, 86-87,90; de¬ 
pression and, 89-96; farmers, 82,84- 
85,87-90; increased interest m, 90- 
91; increased national output and, 

97; increased production and, 93-98, 
257-258; inflation and, 92-93; labor 
and, 89-90,94; liberals and, 88; 
macroeconomic measures to in¬ 
crease, 87; monopoly and, 83; in the 
nineteen-thirties, 87-90; prices and, 
* 3 .89. 9 ft production and, 143-145, 
217-222; resources and, 259; risk and, 
84-85; technology and, 84,259; un¬ 
predictable changes and, 81; wealth 
and, 91-93 

Education, the affluent society and, 
208; as a filter, 205 n; inequality and, 
67; investment in, 200-204.206-208; 
the New Class and, 251-254; poverty 
and, 238, 241; social balance and, 190, 
193,194 n; Spencer on, 48-49; unem¬ 
ployment and, 220; wages and, 30 
Employment, 137-138: affluence and, 
217; capital and, 30; level of demand 
and, 221. See also Full employment; 

Emulation: debt creation and, 145; as 
source of desire, 194 
England, 18,74,90,234; capital forma¬ 
tion, 68; conventional wisdom, 8,12, 
14; economic conditions in, 18,20, 
22,29; housing, 192; increased pro¬ 
duction, to6; Industrial Revolution, 
20,201; the New Class, 252; Social 
Darwinism, 48; wages, 22,29 
Entrepreneurs, 89,200-201; inde¬ 
pendent, 107 

Equality: increase in, 204; social bal¬ 
ance and,226-228 
Exxon Corporation, 140 n 

Factory Acts, 12 
Fair Trade laws, 86 

Farmers: bankrupt, 215; economic secu¬ 
rity, 82,83-85,87-90; inflation and, 
163; monetary policy and, 174; well- 
to-do, 89,90. See also Agriculture 
Farm support prices, 84,96 
Federal Reserve System, 151, r67,168 
Fiscal policy; conservatives and, 180; de¬ 
mand and, 177,184: income and, 180; 
inflation and, 178-180; liberals and, 
177,180,184-185; monetary policy 
and, 177,183.184; peacetime, 180,182; 
prices and, 182-183; production and, 
180-182; wages and, 182-183 
Ford, Henry, 89,141,200 
Ford Motor Company, 89 
France, salt tax, 230 
Franklin, Benjamin, 201 


Full employment, 182, in, 22t; affluence 
and, 217-218; as the norm, 217-218; 
prices and, 165 

General Electric Company, 11,52,85,133 
General Motors Corporation, n, 52,85, 
176 n, 2-59 

Genera] property tax, social balance 
and, 197 

Genghis Khan, 19 
George, Henry, 42-44 
Germany, 19,210; social insurance, 90 
Goldwater, Barry, 52 
Goods; abundance of, 101; aggregate de¬ 
mand for, 173,179; consumer de¬ 
mand and, 114,120-123; declining im¬ 
portance of, 243-244, 247 , 253 - 254 ; 
dependence effect and, 127-131; Gross 
Domestic Product and, 108,109; hap¬ 
piness and. 255-256; investment and, 
206; poverty and, 234; prestige of, 

140; private, 224; production and, 
108-uo, 112-113, M3; public, 224; re¬ 
duction in demand for, 148; social 
balance and, 186-187,189.193 
Gorcr, Geoffrey, 100 n 
Government: individual liberties and, 
199; military spending, 196; price sta¬ 
bility and, 177-179; spending by, 177- 

Government services, socialism and, ui 
Gray, Alexander, 24 n, 42 n 
Great Britain, see England 
Great depression, 38.39,47,61.90-91, 
t}7> 155.211; monetary policy and, 

168; production and, 137 
Gross Domestic Product, 187; goods 
and, 108,109; increase in, 142,190; 
1929-1932,95-96; public services 
and, 108,109 

Guaranteed income, 221,239,240 n 

Hailcybury College, 24 
Hamilton, Alexander, 12 
Hansen, Alvin H., 149 n 

Happiness, 255-256 
1 larberger, Arnold C„ 106 n 
Hargreaves, fames, 201 
Harnman, Edward Henry, 72 
Harrington, Michael, 79 n 
Harris, Seymour E, 109 n, 134 n 
Hearst, William Randolph, 72 
Henry of Champagne, 73 
Hill, James J., 72 
Hofstadter, Richard, 50 n, 51 n 
Holland, 18,191 
Hollywood, 191 

Holmes, Justic Oliver Wendell, 49 
Honolulu, 164 
Hoover, Herbert, 14, is 133 
Hopkins, Sheila V., 19 n 
Housing, 235,240; social balance and, 

Houthakker, H. S„ 126 n 

Idleness; condemnation of, 216; in 
voluntary, 94,108; voluntary, 219- 

Income; agriculture, 89,163; alternative 
sources of, 220; consumer demand 
and, 121,122 n; consumption and, 143 
n; disposable personal, 146; fiscal pol¬ 
icy and, 180; guaranteed, 221,239,240 
n; inequality and, 69-71; inflation 
and, 161 n, 197; median (1955), 147; 
minimum, 239-240; monetary policy 
and. 174,175; poverty and, 235,236, 
238-240; production and, 217-222, 
247-248; redistribution of. 66,78; sav¬ 
ings and, 68; taxes and, 225-228; up¬ 
per limits on, 31 

Income taxes, 196; efficiency and, 213; 
inequality and, 68-70; negative, 221; 
the New Class and, 250 n; social bal¬ 
ance and. 226-232; as a stabilizer, 231. 
See also Taxes 

Increased national output, 102 n-103 n, 
244; economic security and, 97; infla 
tion and, 158; measures for, 113. See 
also Output 

Increased production, 212,255; in ad¬ 
vanced countries, 78; in backward 
countries, 78; economic insecurity 
and, 94-98; economic security and. 
93 - 99 . 257-258; England, 106; infla¬ 
tion and, 158; investment and, 206- 
207; Keynesian fiscal policy and, ma¬ 
jor threat to, 94; redistribution and, 
78; Russia, 257; stylized efforts for, 

112; unemployment and, 138-139,144; 
war and. 107; working conditions 

India, 29,76 

Indifference curves, 112 n 

Indochina, 60 

Industrial Revolution, 20,201 

Inequality, 66-80; capital and, 68; capi¬ 
tal formation and, 67-69; case for, 

67; conservatives and, 70,195; con¬ 
ventional wisdom and, 68,70,79; de¬ 
cline of interest in, 69-73,79,' eco¬ 
nomics and, 23,24; education and, 

67; income and, 69-71; Income tax 
and, 68-70; labor and, 67; liberals 
and, 69-70; Marx on, 65; poverty 
and. 239; social balance and, 195-197; 
trade unions and, 72; Veblcn on, 45- 
46; wealth and, 23,14,7t-77 


Inflation, 154-165; agriculture and, 157; 
competition and, 159-160; conserva¬ 
tives and, 185; consumer demand 
and, 157-161,165; control of, 165; con¬ 
ventional wisdom and, 154,164; debt 
creation and, 149-150; depression 
and, 155,156; economic security and, 
91-91; farmers and, 163; fiscal policy 
and, 178-160; income and, 161 n, 197; 
increased national output and, 157- 
158; increased production and, 157- 
158; influence of inaction, 155; liber¬ 
als and, 154,156; material benefit 
from, 155; measures to control, 156, 
166,184; monetary policy and, 156, 
166-176; as a normal prospect, 18*; 
peacetime, 154-156; production and, 
218; services and, 197; social balance 

and, 195,197-199; taxes and, 180,181; 
trade unions and, 161-163; unemploy¬ 
ment and, 155,156,247; wages and, 
161-162,164-165; World War II, 164 
Insecurity, see Economic insecurity 
Installment buying, 146-147,151-151; in¬ 
terest costs, 171 

Intelligentsia, the businessman and, 
134 - 135 ,141-142 

Interest rate: on car payments, 171; con¬ 
sumer demand and, 157-161; 165; in¬ 
crease in, 169 n, 174; investment and, 
166,173; Keynes on, 168; monetary 
policy and, 169 n-170 n, 171,173,174 
International Business Machines 
(IBM), u, 140 n 

Inventions, 201-202; production and, 

Investment, 200-208; advertising and, 
205; capital formation and, 200; con¬ 
ventional wisdom and, 201-202,206; 
in education, 200-204.207-208; 
goods and, 206,207; increased pro¬ 
duction and, 206-207; in individuals, 
201-205,254; innovations in, 104, 

205- 206; interest rate and, 166,173; 
in material capital, 202; the military, 

206- 207; monetary policy and, 170, 
172-173,175; social balance and, 200, 

207- 208,231-232; technology and, 
200-203; wartime, 107-108 

Iowa, 89 

Iron law of wages, 22,26,30,56 

Jevons, William Stanley, 118 
Johnson, Dr. Samuel, 64 
Johnson Administration. 69 n-71 n 
Johnston, Denis F., 221 n 
Joscphson, Matthew, 74 n 

Kay, John, 201 
Kayscn, Carl, 109 n, 134 n 
Kendrick, John W„ 103 n 
Kennedy, John F., 139 
Kent, lames, 12 
Kentucky, 89 

Keynes, John Maynard (Lord), is, 18 n, 
21 n, 87; conventional wisdom and, 
15,123,139,232; on depressions, 155; 
on ideas, 17; on the interest rate, 188; 
liberals and, 232; on monetary policy, 
168; on needs, 123,125-126; on out¬ 
put, 137,139, 232; on unemployment, 

Kiliing&worth, Charles C., 79 n, 221 n 

Labor, 243- 248; affluence and, 243-247; 
classes of, 248-249; definition of, 248 
n-249 n; economic security and, 89- 
90,93-94; inequality and, 67; length 
of work week, 243-244; Marshall on, 
248 n-249 n; Mar* on, 56 n; monop¬ 
oly and, 105; the New Class and, 248; 
production and, 102,105-106,107. 

See also Trade unions 
Labor force; capacity use of plant and, 
169 n, 180-181; competition in, 245; 
demand and, 169-170; expansion of, 
108; unemployment compensation 
and, 217-218; women and children 
in, 246 

La FolleUe, Robert, 13 
Lampman, Robert, 79 n 
Leisure class, 243-244, 248 
Lcontief, Professor Wassily, 188 
Liberals: commitment to public service, 
198; conventional wisdom and, 8--9. 
13; economic security and, 87; 
employment and, 185; fiscal policy 
and, 177.180,185; inequality and, 69- 
70; inflation and, 154,156; Keynes 
and, 232; output and, 136-142; pov¬ 
erty and, 238-239; production and, 
110-112; sales tax and, 239; social bal¬ 
ance and, 198,228-230,229; social se¬ 
curity and, 87-88; taxes and, 69-70, 

Lloyd, Henry Demarest, 44 
Lloyd George, David, 13 
Locknerv. New York. 49 n 
Los Angdes, 100,190 
Lyrics, Russell, 141 n 


Macroeconomic measures to increase 
security, 87 

Malthus, Thomas Robert, 12-26,29,42. 
47,55.88,107; on marriage, 24; on 
population increase, 25,25,42 
Marginal productivity theory, 50,32-33 
Marginal utility, doctrine of diminish¬ 
ing, 119-120 

Market behavior theory, 91 
Marshal], Alfred, 31,33,41,120; on labor. 

248 n-249 n; on poverty, 243,244 
Martin, Bradley, so 

Mari, Karl, 22,18,43,46,55-64, no; on 
the arts, 56; on capital formation, 56, 
57; on capitalism, 55-61,93; concept 
of history, 60; on depressions, 38, 57- 
58.61,654 on imperialism, 59-61; on 
inequality, 65; influence of, 59-61; on 
labor, 56; on profit, 63; in relation to 
his time, 61-64; on the state, no 
Marxians (Marxists), 55,67,69,71 
Maytag, Fred, II, 68 n 
Mazur, Paul, 148 n 
Menger, Karl, 118 

Microeconomic measures to reduce in¬ 
security, 86,97 
Middle East, 19 

Military, investment and, 206-207; pro¬ 
duction and, 257-258; spending by, 
196; taxes and, 257 
Mill, John Stuart, 21 n, 27,30,41 

Mills, C. Wright, 75 n 
Mises, Ludwig von, 135 n 
MissUsippi-Y’azoo Delta, 237 
Mitchell, Wesley C„ 38,44 n 
Mobility, 212,241 

Monetary policy, 156,166-175; agricul¬ 
ture and, 176; bankers and, 166-169; 
capital and, 178; conservatives and, 
177; consumer borrowing and spend¬ 
ing, 170; consumer credit and, 171; 
definition of, 156; depression and, 

175; fanners and, 174; fiscal policy 
and, 177,181,184; great depression 
and, 168; income and, 174,175; infla¬ 
tion and, 156,166-175; interest rate 

Monetary policy ( corn.) 

and, 169 n-170 n, 171,173,174; invest¬ 
ment and, 170,172,175; Keynes on, 
168; money supply and, 170; mystery 
of, 167-168; prices and, 169-170,172, 
174; production and, 172-174; profit 
and, 173; taxes and, 176 n; unemploy¬ 
ment and. 172; Vietnam war and. 176 
n; wage-price interaction, 169-170; 
want creation and, 171-172; wants 
and, 170-171 

Money: Wh ence It Came, Where It 
Went, 157 n. 

Money supply, monetary policy and, 


Monopoly, 33,36,83.108; capital and, 
105; economic security and, 83; labor 
and, 105; production and, 105-106 
Morgan, J. Pierpont, 72-73 


Nation, The, 47 

National Association of Manufacturers, 

National Bureau of Economic Re¬ 
search, 102 n 

Negative income tax, 221-222 
New Gass, 248-254; advantages of be¬ 
longing to, 251; the affluent society 
and, 252-253; attitude toward pay, 
250,251; conventional wisdom and, 
253,254; education and, 251-253; ef¬ 
forts to Join, 253-254; England, 252, 
hierarchy within, 251; income tax 
and, 250 n; increase in size of 252- 
253; labor and, 248; qualifications for 
entrance, 251-253 
New Deal, 47,75,87 
New Industrial State, The, 72 n, 84 n, 

148 n, 159 n-160 n, 173 n, 202 n, 207 n, 
258 n 

Newport, Rltode Island, 50 
New Republic, The, 47 
New York Gty, 50,133,187 
New York State labor legislation, 49 
New Zealand, 29 

Nixon, Richard M„ 139 n 
Norway, capital formation, 68 

Old age and survivor’s insurance, 96 
Olds, R. E., 141 

Oligopoly; definition of, 157-158; oli¬ 
gopolistic sector and, 173,178; prices 
in, 157-158; unliquidated gains, 174 
Output, 132-142; businessman and, 132- 
142; depression and, 137; economics 
and, 19-21; increasing, 112; Keynes 
on, 137,139,232; liberals and, 136-142; 
prices and, 156; price stability and, 

184 n; unemployment and, 137-138; 
wealth and, 19-20; World War II, 138. 
See also Increased national output 


Patten, Simon N., 44 n 
Pensions, 86,164 
Pigou, A. C„ 149 n 
Pitt, William, 14s 
Political Science Quarterly, 106 n 
Population increase, food supply and, 
19-30; Malthus on, 13,25,42; Ri¬ 
cardo on, 23,25 

Poverty, 1-2,50-51, 66-67,234-242; in 
die affluent society, 238-241; agricul¬ 
ture and, 237; case, 236-237; 238,241; 
causes of, 236-237; charity and, 49, 
236; depression and, 39; economics 
and, 20,23- 24,29,42,47-48; educa¬ 
tion and, 238-241; goods and, 234; 
government services and, income 
and, 221,23$, 238-240; inequality 
and, 239; insular, 236-238; invest¬ 
ment in children and, 240-241; liber¬ 
als and, 238-239; Marshall on, 234, 
235; political position and, 238-239; 
production and, race and, 237-238; 
Ricardo on, 31-33,42,46-48; sales tax 
and, 234-235; as self-perpetuating, 
240-241; social balance and, 189-191, 
241; Social Darwinism and, 53; Ve- 
blen on, 45; wealth and, 20,23-24, 


Prices; administered, 159,161; competi¬ 
tive industries, 159; consumer de¬ 
mand and, 117,158-161; controls on, 
182-184; demand and, 159; economic 
security and, 83,89,96,96-97; fiscal 
policy and, 182-183; increases in, 159, 
172,174; inflation and, monetary pol¬ 
icy and, 169-170,172,174; in oligop¬ 
oly, 157-158’. output and, 156; private 
interference in, wages and, 161-162, 
Price stability, 176-185; conventional 
wisdom and, 179; government spend¬ 
ing and, 178-179; output and, 184 n; 
production and, 177-185 
Privately produced goods; balance in, 
188-192,202, 126; demand for, 113, 

187; public services and, 108-111,186- 
187,193,200,233; in relationship to 
products, 217-218; sales tax and, 229, 
230; wealth and, 186 
Private sector, 202-205 


Production, 99-uj; advertising and, 
223-224; businessman and, too, 132- 
142; capacity use of plant and, 164- 
165,173; capita] and, 102,105, ;o8; 
capital formation and, 104-108; con¬ 
servatives and, 138; consumer de¬ 
mand and, 114-117,122,210; con¬ 
sumer taste and, 102; consumption 
and, 104-103; conventional wisdom 
and, 103,107,110-111,144,148 n; de¬ 
creasing urgency of, 121,210; depend¬ 
ence effect and, 124-131; depression 
and, 105,113; economics and, 114-115; 
economic security and, H3-145.217- 
222; fiscal policy and, 1*1-182; five 
methods for expanding, 102-104; 
goods and, 108-110, m-113,143; great 
depression and, 137; importance of, 
99-102, m-113,209-213,219; income 
and, 217-222,247-24*; inflation and, 
218; innovation in, 103-104; inven¬ 
tions and, 107; labor and, 102,104- 
106,107; liberals and, 110-111; major 

threat to, 94; the military and, 256- 
258; monetary policy and, 172-176; 
monopoly and, 105-106; poverty 
and, preoccupation with, 98,112,130, 
20*, 256; prestige of, 140; price stabil¬ 
ity and, 177-185; privately produced, 
108-m, 113,185-195,200,202,217-218, 
229,231,233; public services and, 109- 

no, 186-188,193,200,233; resources 
and, 217-225; salesmanship and, 127; 
social balance and, 186-193,223-225, 
231-233; stylized attitudes toward, 183; 
substitutes for, 219; tariffs and, 106; 
taxes and, 212; technology and, 102, 
103; as a test of performance, 99-100; 
trade unions and, 212; unemploy¬ 
ment and, 220-221; unemployment 
compensation and, 218-219; virtuos¬ 
ity in, 147-148; want and, 124-131; 
wealth and, 109,110; World War II, 183 

Productivity: as a goal, 101; importance 

of, 101; per worker, 244-24;; shorter 
work week and, 245-246 

Profit: favorable prospects for, 173; 

Marx on, 62; maximization of, 83; 
monetary policy and, 173; Ricardo 
on, 25,26 

Public services, 48-49; attack on, 108- 
112; cost of, 17S, 241; federal appro¬ 
priations for, 196; Gross Domestic 
Product and, 99,108-110; privately 
produced goods and, 99-109.186- 
188,193,200,2331 production and, 
108-112,186-188,193,200.234: social 
balance and, 1851-199; taxes and, 196- 

Public spending: children of the poor 
and, 240-241; compensatory, 96; so¬ 
cialism and, 111; for social purposes, 

Puerto Rko, 237 

Puritan ethos, 146 

Randall, Clarence B„ 11 n 

Rate of interest, see Interest rate 


Rationing, 173 

Reagan, Ronald, 139 n 

Recession, 38; corporations and, 143-144 

Recurring revenues, 12$ 

Resources: distribution of, 223-226; hu¬ 
man, 231-232; in monopolized indus¬ 
try, 105; production and, 224-225; for 
public use, 22s, 232-233; survival and, 

Review of Economics and Statistics. 160 n 
Ricardo, David, 22-29,33,41-42, 43 , 44 , 
142; on population increase, 23,25; 
on poverty, 31-32,42,46 48; on 
profits, 25,26; on wages, 25-26; on 
wealth, 46 

Risks, 94; economic security and, 83-85 
Robinson, Joan, 57 n, 63 n 
Robtnson-Palman Act, 86 
Rockefeller, lohn D., 32,51,72,140 n 
Roosevelt, Franklin D., 13,14,47,138 n; 
on balanced budget, 15; on unem¬ 
ployment, 137-139 
Ruskin, |ohn, 55 
Russell, Bertrand, 255 n 
Russia, 257; increased production, 257- 
258; space exploration, 257 

Salesmanship, dependence effect and, 

Sales tax; affluence and, 230; the 

affluent society and, 228-232; conser¬ 
vatives and, 233; liberals and, 229; 
poverty and, 235-236; privately pro¬ 
duced goods and, 229, 231; social bal¬ 
ance and, 228-232 
Salter, Sir Arthur, 61 
Salt tax, 230 

Scandinavia, housing in, 192 
Schlesinger, Arthur M„ Jr., 14 n 
Schumpeter, Joseph A., 38,57 n, 60 n, 

62 n 

Scientific research, 205-206. See also 

Security, see Economic security 


S6e, Henri, 12 n 

Services: collectively purchased, 110; de¬ 
pression and, 198; inflation and, 197; 
private, 189,193-195.224; public, 189- 
199,214,225,232-233; resources for, 
225,231-233; taxes and, 196 
Sismondi, Leonard, 56 
Smith, Adam, n, 21-22,24-26,41-42, 

57,61; on bargaining power, 30; on 
value, 118; on wages, 21-22 
Social balance, 186-198,223-233; adver¬ 
tising and, 194-195; the afiluent soci¬ 
ety and, 228-232; competition and, 
194-195; conservatives and, 195,231, 
232; in consumption, 189,207-208; 
conventional wisdom and, 193-194; 
education and, 191,193,194 n; equal¬ 
ity and, 227-228; federal government 
and, 226-227; General property tax 
and, 197; goods and, 186-188,190, 

193,223; housing, 192; income taxes 
and, 226-232; inequality and, 195- 
197; inflation and, 195,197-199; in¬ 
vestment and, 200,207-208,231; lib¬ 
erals and, 198,229; peacetime, 188; 
poverty and, 186-188,241; private 
services, 189,193-195; production 
and, 186-192,223-225,230-233; pub¬ 
lic services, 189-199; sales tax and, 
228-232; taxes and, 195-197,226,229, 
231-232; test for, 233; wages, 197-198; 
wants and. 193.198; wealth and, 186- 

Social Darwinism, 47-53,54,65,187; 
affluence and, 49; competition, 47- 
53; England, 49; poverty and, 53 
Social imbalance: economic growth 
and, 232; employment and, 227 n; lo¬ 
cal governments and, 197 
Social insurance, 12; Germany, 90; old 
age, 83; unemployment, 83 
Socialism, 27,55; conventional wisdom 
and, 111; government services and m; 
public spending and, 111 
Social security, 86,91-92,151; the busi¬ 
nessman and, 86,91-92; liberals and, 

South America, 76 
Space exploration, 257 
Spencer, Herbert, 48-52; on education, 

Standard Oil Company, 32-33,51 
Stigler, George, 32 n 
Strachey, John, 61,62 n 
Sumner, William Graham, 49, si, S2 
Survival, 255-260 
Sutton, Francis X., 109 n, 134 n 
Swados, Harvey, 251 n 
Swigert, Ernest L., 68 n 


Tariff*, 212,213; efficiency and, 213; in¬ 
dustry and, 222; production and, 106, 

Taussig, Frank W., 32,33 
Tawney, R. H., 67, too, 186 
Taxes, 225; capital gains, 70,228, conser¬ 
vatives and, 70-72,227,232,232; con¬ 
ventional wisdom and, 226; debt 
creation and, 150-232; demand and, 
179-180; depletion allowance and, 
228; depression and, 179; income 
and, 225—228; inflation and, 180,182; 
liberals and, 69,227; the military and, 
257; monetary policy and, 176 n; 
peacetime, 180; production and, 211- 
212; salt tax, 230; services and, 195; so¬ 
cial balance and, 195-197.226,228- 
239,232. See also General property 
tax; Income taxes; Sales tax 
Taylor, L D„ 126 n-127 n 
Technology, 84,103,200, 245,259-260; 
economic security and, 83-84,257- 
259; investment and, 200-203; in 19th 
century. 201; production and, 102, 

103; security and, 257 
Tennessee, 89-90 
Third World, 29 
Thirty Years' Wat, 19 
Tobin, James, 109 n, 134 n 
Trade associations, 86 

Trade unions, 12,30,35,51,78,212; 
feather-bedding, 94; inequality and, 

72; inflation and, 161-163; production 
and, 211-212; wages and, 161-162. See 
also Labor 

Uncmployablcs, 220-222 
Unemployment, 88-89,92-93.96-98; 
debt creation and, 150; as a deliberate 
policy, 221-222; education and, 220; 
increased production and, 138-139, 
144; inflation and, 155,156,247-148; 
involuntary, 94,108,218-219; Keynes 
on, 177; monetary policy and, 172; 
output and, 136-138; as political is¬ 
sue, 90-98,139; production and, 220- 
222; Roosevelt on, 137; social insur¬ 
ance, 82; statistics, 95-96; 219; stigma 
attached to, 219; wages and, 32 
Unemployment compensation,86,92- 
93; 96; labor force and, 218-219; prin¬ 
cipal purposes of, 218-219; produc¬ 
tion and, 218-222, See also Cyclically 
Graduated Compensation (CGC) 
Unions, see Trade unions 
United Kingdom, see England 
United States Chamber of Commerce, 

7. too 

United States Department of Com¬ 
merce, 70 n 

United States Office of Economic Op¬ 
portunity, 79 n, 239 n 
United States Office of Price Admini¬ 
stration, 164 n 

United States Supreme Court, 49 
Unliquidated gains, 160,165,178 n; re¬ 
serve of, 174 

Vanderbilt, Cornelius, 205 
Vanderbilt, Mrs. William K., 50 
Veblen, Thorstein, 42-47,45 n; on in¬ 
equality, 45-46; on poverty, 45 
Vested interest, 132,136,139; definition 
of, 132 

Vietnam war, 176 n, 234 

Villa rd, Henry H. 106 n 
Voltaire, 12 

Wages, 18-19; capitalism and, 21-22; 
control on, 182-184; education and, 
30; England, 22,29; fiscal policy and, 
182-184; inflation and, 161-162,164- 
165; iron law of, 22,26,30,56; mar¬ 
ginal productivity and, 32; mini¬ 
mum, 31; monetary policy and, 
169-170; prices and, 161-162,164-165, 

169- 170,182-184; Ricardo on, 25-26; 
Smith on, 21-22; social balance and, 
197-198; Taussig on, 31; trade unions 
and, 162; unemployment and, 32 

Wages fund, 30 
Wallich, 1 lenry C„ 79 n 
Want creation; advertising and, 127 n; 
expansion of debt and, 148,151; 
financing and, 171; happiness and, 

214; monetary policy and, 171-172. 

See also Dependence effect 
Wants; advertising and, 126,145-146; 
affluence and, 129; consumer de¬ 
mand and, 117-120; debt creation 
and, 145-147,148; dependence effect 
and, 124-131; independently deter¬ 
mined. 170; monetary policy and, 

170- 171; private vs. public, 198-199; 
production and, 124-131; social bal¬ 
ance and, 194, 199; as urgent, 144 

War, increased production and, 107-108 
War on poverty, 69 n-70 n 
Watson, Thomas, 140 n 
Watt, James, 201 

Wealth; economics and, 18,20,21,25, 

27,29,32-33; economic security and, 
91-92; inequality and, 23,24,71-77; 
inheritance of, 33; output and, 19-20; 
physical possession and, 74-76; pov¬ 
erty and, 20,23-24,29,42,47-48; pri¬ 
vately produced goods and, 186; pro¬ 
duction and, 109,110; Ricardo on, 46; 
social balance and, 186-188,189,223. 
See also Affluence 
Weapons culture, 257 
Webb, Beatrice and Sidney, 13 
Welfare, 48,86,96 
West Virginia, 237 

Work: attitudes toward, 249-250; condi¬ 
tions of, 244-245; leisure and, 243, 
244; overtime and, 244; as a required 
economic institution, 248-251; statis¬ 
tics, 246 

Work week, length of, 243-245 
World War 1 ,38 

World War 11 ; increased production, 

107; inflation, 164; output, 138; pro¬ 
duction. 183 
Wyllic, Irving G., 215 n 
Wyoming, 237 


*Note the reference to men. That is the pattern throughout the book, 
too pervasive for ready recasting. As an early supporter of the women's 
movement, this I would now change if I were beginning anew. 


1 Clarence B. Randall, A Creed for Free Enterprise (Boston: Atlantic- 
Little, Brown, 1952), pp. 3, 5. 


2 "Tenth Philosophical Letter." Quoted by Henri See, Modern 
Capitalism (New York: Adelphi, 1928), p. 87. 


3 Arthur M. Schlesinger, Jr., The Crisis of the Old Order (Boston: 
Houghton Mifflin, 1956), p. 232. 


1 J. M. Keynes, "Economic Possibilities for Our Grandchildren," 
Essays in Persuasion (London: Macmillan, 1931), p. 360. 



2 E. H. Phelps Brown and Sheila V. Hopkins, "Seven Centuries of the 
Prices of Consumables, Compared with Builders' Wage Rates." 
Economica, New Series; Vol. XXIII, No. 92 (November 1956). 



3 have used the phrase "central tradition" to denote the main current of 
ideas in descent from Smith. The more common reference to the "classical 
tradition" is ruled out by a difference of opinion, in my view, a rather futile 
one, as to whether classical economics should or should not be considered 
to have ended with John Stuart Mill and J. E. Cairnes. Another possible 
reference is to the orthodox tradition. But this, by implication, excludes 
those like Keynes who, though working in the same current of ideas, have 
taken sharp issue with accepted conclusions. 


4 Wealth of Nations, Ch. VIII. (There are so many editions of this 
famous work that it seems idle to cite the pages of the particular edition 
one happens to use.) 


5 Wealth of Nations, Ch. VIII. 


6 Wealth of Nations, Ch. VIII. Smith observes that this was written in 
1773 before "the commencement of the late disturbances," meaning the 
American Revolution. 


7 Alexander Gray, The Development of Economic Doctrine (London: 
Longmans, Green, 1931), p. 163. 



8 Letter to Malthus, October 9, 1820. In The Works and 

Correspondence of David Ricardo, ed. by Piero Sraffa (Cambridge, 
England: Cambridge University Press, 1951), Vol. VIII, p. 278. 


9 Letter to Malthus, Vol. I, p. 78. 

10 Letter to Malthus, Vol. I, p. 411. 

11 Letter to Malthus, Vol. I, p. 93. 




12 Letter to Malthus, Vol. I, p. 105. 


13 Letter to Malthus, Vol. II, p. 117. 


1 Alfred Marshall, Principles of Economics, 8th ed. (London: 
Macmillan, 1927), p. 577. The highly infelicitous expression is exceptional 


in Marshall. 


2 F. W. Taussig, Principles of Economics, 3d ed. (New York: 
Macmillan, 1936), p. 223. The first edition was published in 1911. 


3 G. J. Stigler, "The Economics of Minimum Wage Legislation," 
American Economic Review, Vol. XXXVI, No. 3 (lune 1946), p. 358. 


4 New York Times, March 4, 1957. 


5 Marshall, Principles of Economics, p. 714. 


6 Taussig, Principles of Economics, p. 207. 


7 1 have so observed at more length in American Capitalism: The 
Concept of Countervailing Power (Boston: Houghton Mifflin, 1952, 
1956), especially Chapter II. 



8 Marshall, Principles of Economics, p. 8. 


9 have also dealt with this source of uneasiness in American 



10 J. A. Schumpeter, Essays, ed. by Richard V. Clemence (Cambridge, 
Mass.: Addison-Wesley, 1951), p. 117. This essay was originally 
published in 1934 in The Economics of the Recovery Program (New York: 
Whittlesey House, McGraw-Hill). The italics are in the original. 


1 Quoted by Alexander Gray, The Development of Economic Doctrine 
(London: Longmans, Green, 1931), p. 256. 


2 See Joseph Dorfman, The Economic Mind in American Civilization, 
1606-1865 (New York: Viking, 1946), p. 804. 


3 Henry George, Progress and Poverty, Fiftieth Anniversary ed. (New 
York: Robert Shalkenbach Foundation, 1933), p. 5. 



4 Progress and Poverty, p. 9. 



5 A case might be made for the influence of three other men who were 
generally outside the central tradition; namely, Simon N. Patten (1852— 
1922), John R. Commons (1862-1945), and Wesley C. Mitchell (1874— 
1948). However, Patten, a singularly interesting and original figure, has 
joined Carey in the neglect reserved for American heretics. Commons and 
Mitchell, as a matter of principle or method, largely avoided any overall 
theoretical formulation of man's economic prospect and hence contributed 
little to the attitudes with which we are here concerned. 


6 Thorstein Veblen, The Theory of Business Enterprise, 1932 ed. 
(New York: Scribner), P. 234. 


7 The conclusions sketched above are principally developed in The 
Theory of Business Enterprise. The quote is on p. 183. 



8 Originally published in 1899. There is a later edition, to which I 
contributed an introduction, published in 1973 (Boston: Houghton 



9 The Theory of the Leisure Class, p. 41. 



10 This is a criticism which, I think, can fairly be made of Professor 
Henry Steele Commager. Cf. his discussion of Veblen in The American 
Mind (New Haven: Yale University Press, 1950), pp. 227-246. 


11 David Ricardo, Principles of Political Economy (Cambridge, 
England: University Press for the Royal Economic Society, 1951), pp. 


12 Herbert Spencer, Social Statics (New York: D. Appleton, 1865), p. 


13 Herbert Spencer, Principles of Ethics, Vol. II (New York: D. 
Appleton & Co., 1897), p. 260. 


14 Lochner v. New York, 1904. 



15 Quoted by Richard Hofstadter, Social Darwinism in American 
Thought (Boston: Beacon Press, 1955), p. 31. 



16 William Graham Sumner, Essays in Political and Social Science 
(New York: Henry Holt, 1885), p. 85. 


17 Quoted by Hofstadter, Social Darwinism in American Thought, p. 


1 Karl Marx, Capital (London: william Gliesher, 1918), pp. 660-661. 


2 Quoted in Capital, p. 664. 



3 Marx's explanation of the business cycle is scattered through his 
work and is in some respects, as Professor Schumpeter has observed, 
rather casual. This summary owes much to Joan Robinson's indispensable 
book, An Essay on Marxian Economics (London: Macmillan, 1952). 



4 I should, perhaps, remind the reader that I am here concerned with a 
characterization of the Marxian position and of its impact on attitudes and 
not with a critique. Marxian critiques are still very, very long. 


5 Karl Marx, Communist Manifesto. 


6 Communist Manifesto. 


7 Joseph A. Schumpeter, Capitalism, Socialism ands Democracy, 2nd 
ed. (New York: Harper, 1947), p. 21. 


8 John Strachey, The Coming Struggle for Power, 4th ed. (London: 
Gollancz, 1934), p. 8. 


9 Arthur Salter, Recovery: The Second Effort (London: G. Bell & Sons, 
1934), p.209. 



10 Schumpeter, Capitalism, Socialism and Democracy, p. 5. In the 
central tradition, by contrast, such passionate belief was thought 
inconsistent with scientific rationalism. Not exclusively, to be sure. Marx 
once observed with some justice that "Economists are like theologians ... 
Every religion other than their own is the invention of man, whereas their 
own particular brand of religion is an emanation from God." (From The 
Misery of Philosophy, quoted by Strachey in The Coming Struggle for 



11 Joan Robinson, An Essay on Marxian Economics, p. 42. For a 
different modification see Paul Baran and Paul M. Sweezy, Monopoly 
Capital (New York: Monthly Review Press, 1966). 


12 The saying owes its modern fame to Winston Churchill, who noted 
that his mind had been so focused by the prospect of the invasion of 
Britain in 1940. 


1 R. H. Tawney, Equality, 4th ed., rev. (London: Allen & Unwin, 
1952), p. 85. 


2 "Taxes and America's Future." Address by Fred Maytag II, before 
the National Association of Manufacturers, December 1, 1954. 



3 "The Relation of Taxes to Economic Growth." Address by Ernest L. 
Swigert, before the National Association of Manufacturers, December 6, 



4 Alice Bourneuf, Norway: The Planned Revival (Cambridge, Mass.: 
Harvard University Press, 1958). 


5 The so-called war on poverty of the Johnson administration was 
instructive: income redistribution was to be limited to the very poor. The 
more important improvement in the incomes of the poor was to come from 
the increased productivity of that group. The ability of all shades of 
political opinion to endorse aspects of this program suggests the mildness 
of the effort. 



6 U.S. Department of Commerce, Statistical Abstract of the United 
States. The 1970 figures are from p. 324 of the 1972 edition; the 1972 
figures from p. 382 of the 1974 edition. 


7 See Chapter 11. 



8 More precisely, to the aggregation of technical and planning talent 
which I have elsewhere called the technostructure. Cf. The New Industrial 


State, 2nd ed., rev. (Boston: Houghton Mifflin, 1971), Chs. VI, VII and 
Economics and the Public Purpose (Boston: Houghton Mifflin, 1973). 



9 Matthew Josephson, The Robber Barons (New York: Harcourt, 
Brace, 1934), p. 330. Josephson is paraphrasing W. A. Croffut, 
Commodore Vanderbilt's biographer, writing in 1885. 


10 Cf. C. Wright Mills, The Power Elite (New York: Oxford 
University Press, 1956), p. 117. Mr. Mills suggests that in the depression 
years this effort to provide protective coloration led to the recruiting of 
technicians and corporate managers as front men behind whom the well- 
to-do could survive in peace. Not uncharacteristically, I think, Mr. Mills 
read too much contrivance into such change. 



11 "Learning to Multiply and to Divide." Address by Roger M. 
Blough, Chairman of the Board of the United States Steel Corporation, 
quoting Professor Henry C. Wallich of Yale University, latterly of the 
Board of Governors of the Federal Reserve System, January 15, 1957. 



12 Although to the extent that it is associated with race, a more militant 
minority than here suggested. It seems fair to attribute to the discussion 
following the first publication of this volume and the later work of Michael 
Harrington, Robert Lampman, Charles C. Killings worth and those 
associated with the Office of Economic Opportunity some influence in 
making this poverty less anonymous than it was in 1958. However, the 
evident decline of poverty as a source of concern is not very encouraging. 




1 In the first edition, I noted that "these are matters which I hope to 
treat in much greater detail in a forthcoming book on the corporation and 
the corporate personality." This I did in The New Industrial State (Boston: 
Houghton Mifflin, 1967 and later editions). 


2 Estimates are in 1950 prices. They are from America's Needs and 
Resources, A New Survey, by J. Frederic Dewhurst and Associates (New 
York: Twentieth Century Fund, 1955), P. 40. 


3 U.S. Department of Commerce, Historical Statistics of the United 
States (Washington: U.S. Government Printing Office, 1961), p. 139. 


4 Economic Indicators, Historical and Descriptive Supplement, 1955. 
Joint Committee on the Economic Report. 



1 Geoffrey Gorer, The Americans (Fondon: Cresset Press, 1948), p. 
121 . 



2 Study of the comparative effect of these five paths to change does 
not produce unambiguous results. Changes are closely interrelated. An 
early study, that of the period between 1869-73 and 1944-53, shows that 
net national output increased at an average annual rate of 3.5 percent, of 
which about half (1.7 percent) can be attributed to the increase in capital 
and labor supply. The remainder can reasonably be imputed to 
technological improvement in capital and the parallel improvement in the 
people who devise the better capital equipment and operate it. In recent 
times, a growing share of the increase is attributable to such technological 
advance and a declining share to mere increases in capital and labor 
supply. Cf. Moses Abramovitz, Resources and Output Trends in the 
United States Since 1870, and John W. Kendrick, Productivity Trends: 
Capital and Labor, Occasional papers 52 and 53 of the National Bureau of 
Economic Research, New York, 1956. 


3 have discussed this point in some detail in my American Capitalism: 
The Concept of Countervailing Power (Boston: Houghton Mifflin, 1952, 
1956), pp. 84-94. 



4 Although there were competent expressions of doubt as to the losses 
from monopoly. Cf. in particular "Monopoly and Resource Allocation," by 
Arnold C. Harberger, American Economic Review, Proceedings, Vol. 
XLIV, No. 2 (May 1954), and "The Social Cost of Corporate Monopoly 
Profits," by Henry H. Villard, Political Science Quarterly, Vol. LXXII, 
No. 3 (September 1957). 



5 Francis X. Sutton, Seymour E. Harris, Carl Kaysen, and James 
Tobin, The American Business Creed (Cambridge, Mass.: Harvard 
University Press, 1956), p. 195. 



1 "The Economist as a Modern Missionary," The Economic Journal, 
March 1956. 



2 The provenance of the theory of consumer behavior is sketched in I. 
D. M. Little's interesting article, "A Reformulation of Consumer 
Behavior," Oxford Economic Papers, New Series, Vol. 1, No. 1 (January 
1949), p. 99.' 


3 Wealth of Nations. Smith did not foresee the industrial diamond. 



4 Earlier editions, with more foresight than I've always manifested, 
warned that "some possible circumstances of world shortage" could 
increase this preoccupation. As regards world needs, they have. 


5 Principles of Economics, 8th ed. (London: Macmillan, 1927), p. 16. 


6 In the yet more technical analysis of consumer demand, attention 
has been further diverted from the diminishing urgency of product by the 


shift from cardinal to ordinal utility as an instrument of analysis. Ordinal 
analysis treats the consumer's desires strictly in terms of the preferences of 
one good as against the other. This does not mean either that the notion of 
diminishing marginal utility of a good or the diminishing urgency of 
additional products disappears. In the indifference map or surface, 
diminishing marginal utility is what makes the consumer willing, with an 
increasing stock, to surrender more and more of one product to have a 
given quantity of another. Recreation will not enter the consumer's 
preference system except in combination with some minimum quantity of 
food. Food can be present without recreation. 

However, these considerations are not obtrusive in the analysis or its 
pedagogy. The much more evident fact is that food, gasoline and pinball 
all exchange for one another at given rates and thus are equated one with 
the other. The point most stressed in the pedagogy is that the consumer 
will always find his highest satisfaction on the highest indifference curve 
that his income allows him to reach. The effect of higher income or of a 
larger product at lower prices is to put the consumer on a higher curve. 
This goal is implicit in the analysis. Thus a line of thought which once 
might seem to throw doubt on the importance of marginal increments to 
the stock of goods ends by affirming it. In practice, the analytical 
apparatus excludes from consideration the possibility that the movement to 
higher and higher indifference curves is of declining urgency. 



7 J. M. Keynes, Essays in Persuasion, "Economic Possibilities for Our 
Grandchildren" (London: Macmillan, 1931), pp. 365-66. Notice that 
Keynes, as always little bound by the conventional rules, did not hesitate 
to commit the unpardonable sin of distinguishing between categories of 


1 J. M. Keynes, Essays in Persuasion, "Economic Possibilities for Our 
Grandchildren" (London: Macmillan, 1931), p. 365. 



2 James'S. Duesenberry, Income, Saving and the Theory of Consumer 
Behavior (Cambridge, Mass.: Harvard University Press, 1949), p. 28. 



3 A more recent and definitive study of consumer demand has added 
even more support. Professors Houthakker and Taylor, in a statistical study 
of the determinants of demand, found that for most products price and 
income, the accepted determinants, were less important than past 
consumption of the product. This "psychological stock," as they called it, 
concedes the weakness of traditional theory; current demand cannot be 
explained without recourse to past consumption. Such demand nurtures the 
need for its own increase. H. S. Houthakker and L. D. Taylor, Consumer 
Demand in the United States, 2nd ed., enlarged (Cambridge, Mass.: 
Harvard University Press, 1970). 



4 Advertising is not a simple phenomenon. It is also important in 
competitive strategy and want creation is, ordinarily, a complementary 
result of efforts to shift the demand curve of the individual firm at the 
expense of others or (less importantly, I think) to change its shape by 
increasing the degree of product differentiation. Some of the failure of 
economists to identify advertising with want creation may be attributed to 
the undue attention that its use in purely competitive strategy has attracted. 
It should be noted, however, that the competitive manipulation of 
consumer desire is only possible, at least on any appreciable scale, when 
such need is not strongly felt. 



1 Francis X. Sutton, Seymour E. Harris, Carl Kaysen, and lames 
Tobin, The American Business Creed (Cambridge, Mass.: Harvard 


University Press, 1956), p. 195. 


2 Ludwig von Mises, The Anti-Capitalistic Mentality (Princeton, N.J.: 
Van Nostrand, 1956), p. 107. 


3 The Anti-Capitalistic Mentality, p. 20. Professor von Mises, it should 
be observed in fairness, would be regarded by many present-day 
businessmen as rather extreme. 


4 Seep. 107. 



5 Although numerous liberals, including unquestionably Roosevelt 
himself, were also reluctant. And some chose to become conservatives on 
the issue. 


6 In time, it should be observed, even for Republican Presidents. In 
1969, President Richard Nixon proclaimed his conversion to Keynes. So 
later, in policy if not in name, did President Ronald Reagan. 



7 Also, he is no longer boss in the old sense. Rather, he is chairman of 
what I have elsewhere called the technostracture. This makes the 
significant decisions. The name of the current head of Exxon or IBM is 
unknown outside the industry. All the world knew of Rockefeller and 


8 For a roughly similar conclusion, see Russell Lynes, A Surfeit of 
Honey (New York: Harper, 1957). 



1 The reference to most goods and most people should perhaps be 
emphasized. Were income so redistributed as to eliminate the present class 
stratification in consumption and bring everyone up to a high minimum, 
the increased claim on productive resources for supplying the resulting 
demand would be large. This is a point that might have been more 
adequately emphasized in earlier editions. 


2 The large corporation, as I argue presently, has a far easier time 
accommodating to inflation. 



3 Economic Indicators, Washington: U.S. Government Printing Office, 
June 1957. And Consumer Credit, Supplement to Banking and Monetary 
Statistics, Board of Governors of the Federal Reserve System, September 
1965. And Statistical Abstract, 1968. And Survey of Current Business, 
April 1975. 



4 These data are all from Consumer Installment Credit, Pt. I, Vol. I, 
Growth and Import, Board of Governors of the Federal Reserve System, 
Washington, D.C., 1957. 


5 Board of Governors of the Federal Reserve System based on data 
from the Survey Research Center, University of Michigan. 


1 In the conventional wisdom, just as there has been hesitation in 
stressing the role of advertising and salesmanship in want creation so there 
has been little tendency to explore our dependence on such persuasion. An 
exception is Paul Mazur, whose book The Standards We Raise (New York: 
Harper, 1953) has a forthright Philistinism that, while it doubtless cost him 
scholarly attention, brought him refreshingly close to the modern role of 
advertising and related activities. I have dealt in more detail with the 
functional role of want creation and management in The New Industrial 
State (Boston: Houghton Mifflin, 1967). 


7 A. C. Pigou, Income (London: Macmillan, 1946), pp. 89-90. 



8 Alvin H. Hansen, Business Cycles and National Income (New York: 
Norton, 1951), p. 17. Professor Hansen went on to observe that consumers' 
durables, including automobiles, can be an original source of fluctuation. 
These are the consumer products principally associated with debt creation. 




1 I have written a good deal on various aspects of the inflation 
problem, and I am concerned to avoid repeating myself unnecessarily here. 
I first dealt comprehensively with inflation in the general context of big 
firms and unions in the final chapters of American Capitalism: The 
Concept of Countervailing Power (Boston: Houghton Mifflin, 1952, 
1956). The theoretical implications of the coexistence of competitive and 
oligopolistic market structures and the absence of full short-run 
maximization by the latter were then developed in "Market Structure and 
Stabilization Policy," Review of Economics and Statistics (Vol. XXXIX, 
No. 2, May 1957), and summarized in nontechnical form in a statement 
prepared for the Subcommittee on Antitrust and Monopoly, Committee on 
the Judiciary, of the United States Senate ( Hearings, July 11, 1957). A 
more recent effort is Money: Whence It Came, Where It Went (Boston: 
Houghton Mifflin, 1975). My views on the inflation problem have changed 
(and I trust developed) over the years. In particular, I regard the ensuing 
statement of the causes of inflation, though similar in broad contour, to be 
somewhat more precise than that first adumbrated in American Capitalism. 



2 It seems likely that many economists have been reluctant to concede 
the possibility of such "restraint" in pricing because it seemed to be in 
conflict with self-interest. In fact, no such forbearance need be involved. 
As I seek to show in The New Industrial State (Boston: Houghton Mifflin, 
1967), maximization of growth and of the needs of the techno structure also 
leads to such "restraint." That book contains my mature views. 



3 These movements will be affected, also, by differential movements 
in demand and also differences in the rate at which different industries 
adapt their plant to changes in demand. To stress the role of unliquidated 
gains—in the absence of which one cannot satisfactorily explain the ability 


of industrial firms to respond as they do to wage increases—is not to 
exclude these commonplace effects. Cf. the article by Robert Solomon, 
"Galbraith on Market Structure and Economic Stabilization Policy," and 
my comment, Review of Economics and Statistics, Vol. XL, No. 2 (May 



4 It is, of course, a part of the progressive expansion of money incomes 
which sustains the inflationary movement. But it is still true that the price 
increase precedes and does not follow the expansion in income. 



5 This explanation, as I come to this edition, is somewhat dated. Since 
first writing this, unions have diminished substantially in strength. And, a 
related factor, so have the great traditional mass-production industries, 
such as steel. Services, professions, the arts, entertainment and demand 
creation—advertising and salesmanship—have become much more 
important, and here generally unions are unimportant. 



6 The example earns its mention here only because it was 
accomplished under authority delegated to the military authorities by the 
Office of Price Administration (or, more precisely, its predecessor) in 
which I held the responsible authority. The step, for which I assumed I 
would be held to account, greatly worried me. Uniquely among acts of 
public insanity with which I have been associated, it never became a 
matter of public knowledge. 


1 This will serve the same purposes as an absolute reduction if the 


plant capacity and labor force of the economy are also increasing. It is 
convenient in any discussion to speak in terms of absolute magnitudes— 
whether an increase in interest rates does or does not reduce total 
spending. But while this is a convenient simplification of language, and 
one that leads to no important error, the question in a growing economy 
will ordinarily be whether the rate of increase in demand is reduced 
relative to the rate of increase in capacity. The difference in these rates will 
be the source of the slack on which price stability depends. 



2 Theoretically, the rise in the interest rate could encourage consumer 
saving from current income and by the same act reduce spending from 
current income. The possibility of such an effect, though once suggested, 
is no longer seriously urged even by the most convinced supporters of 
monetary policy. 



3 I here retain earlier car prices. For automobiles that cost more, as 
now, the effect is the same. 


4 In The New Industrial State (Boston: Houghton Mifflin, 1967), as I 
have earlier observed, I deal more fully with this failure to maximize 
revenues. As I show there, it derives from the large need to stabilize the 
parameters within which the planning of the large industrial firm proceeds. 
And security, growth and technological virtuosity share pride of place with 
profits as a goal of this planning. In later writing, I might note, I've called 
the oligopolistic sector the Planning System. See Economics and the 
Public Purpose (Boston: Houghton Mifflin, 1973). 



5 Events of the nineteen-seventies emphasized these conclusions. A 
particularly painful manifestation was the severe depression in the housing 
industry which followed from the efforts to arrest the inflation of the mid¬ 
seventies with monetary policy. 


6 As the experience of the mid-seventies has also affirmed. 



7 Since the earlier editions of this book, circumstance has forced some 
increase in understanding of these matters. The Vietnam war, and the 
delay in raising taxes to offset the increased spending occasioned by that 
eccentric enterprise, forced an unparalleled reliance on monetary policy. 
As this inflationary influence receded, the wage-price spiral took over as a 
strong inflationary force with abetting effect from fiscal policy and 
materials shortages. Interest rates were raised to levels unknown for forty 
years. This was with punishing effect on those who had to pay them. This 
punishment extended to states and localities which are heavily dependent 
on borrowed funds. And it added to the problem of social balance to which 
we shall presently come. While General Motors was not inhibited in its 
investment, the municipality contemplating a school-bond issue most 
certainly was. So was the home-builder. And withal, prices continued to 
rise—inflation was doubtless tempered, but it was not controlled. The 
lessons of this dismal experience were not lost, at least on the less 
passionate friends of monetary policy. Yet in economics, as in love, hope 
dies hard. No other course of action in economics has ever rivaled 
monetary policy in its capacity to survive failure. 


1 Where there are unliquidated gains, prices will fall less promptly and 


earnings will be less promptly reduced than in a competitive industry 
where there are no such gains. 


2 The straightforward, uncomplicated, free-enterprise mind has been 
enjoying a special vogue in the years preceding this edition. 



3 The hold of these ideas is sufficiently strong so that many would 
prefer the minor effect on output that would come from efficient resource 
allocation by the market in a context of price stability and some 
unemployment to the much greater effect on production which would 
come from (a) using the unemployed resources and (b) having the 
incentive to increased output which may be expected when demand 
presses on capacity. 


1 Equality, 4th ed., rev. (London: Allen & Unwin, 1952), pp. 134-135. 



2 In Economics and the Public Purpose (Boston: Houghton Mifflin, 
1973), I have related the performance of public functions much more 
closely to the power of the part of the private sector being served. Thus the 
comparatively ample supply of highways, the more than ample supply of 
weapons and the poor supply of municipal services and public health care. 



3 Emulation does operate between communities. A new school in one 
community does exert pressure on others to remain abreast. However, as 
compared with the pervasive effects of emulation in extending the demand 
for privately produced consumer's goods, there will be agreement, I think, 
that this intercommunity effect is probably small. 


4 Arthur F. Burns, Chairman of the President's Council of Economic 
Advisers, U.S. News and World Report, May 6, 1955. 



5 F. A. von Hayek, The Road to Serfdom (London: George Routledge 
& Sons, 1944), p. 98. As a retrospective reward for this and similar if more 
technical thought, Professor von Hayek received the Nobel Prize in 
Economics in 1974. 



1 I have argued in The New Industrial State (Boston: Houghton 
Mifflin, 1967) and in Economics and the Public Purpose (Boston: 
Houghton Mifflin, 1973) that it is not a reflection of freely operating 
market forces responding exclusively to the prospect for profit. It reflects 
the planning goals of the firm that makes it, and these will include growth, 
security and even some technological virtuosity. 


2 Since this was written and under the impact of Soviet scientific 
achievements, there has been discussion of our lag in investment in 
scientific education. However, this is being treated as a kind of aberration, 
and not as a fundamental flaw in our machinery of resource allocation. 

The foregoing footnote was to the first edition. Since then the allocation of 


resources to human development has increased, as also the tendency to 
describe it as an investment in human capital. Thus progress. But the basic 
problem of allocation as between material and personal capital, reflecting 
their respective locations in the private and public sectors, remains. And so 
does the discrimination in favor of material investment. 



3 There is a differing view that much of the value of education lies in 
its role as a filter—as a means, in effect, of legitimatizing discrimination in 
favor of the talented. On this, see Lester C. Thurow, "Education and 
Economic Equality," The Public Interest, No. 28 (Summer 1972), and 
Kenneth J. Arrow, "Higher Education as a Filter," Journal of Public 
Economics, Vol. 2, No. 3 (July 1973). 


4 Cf. American Capitalism, 2nd ed. (Boston: Houghton Mifflin, 1956), 
pp. 84-94. 



5 Some are. Military needs reflect the substantial management of 
military demand by supplying firms. On this, also see The New Industrial 
State, Chs. XXVI—XXIX. 



1 Committing us, to repeat, to the tenuous process of private want 
creation, causing social imbalance, contributing to economic instability, 
and threatening, among other things, the supply of trained manpower. 



2 Cf. Hearings before the United States Senate Select Committee on 
Small Business, June 29, 1967. My case that the size of the large 
corporation served its planning purposes was strongly attacked by small- 
business advocates on the noncongruent ground that it was larger than 
necessary for technical efficiency. 



3 William A. Alcott (a New England moralist and schoolmaster of the 
last century) quoted by Irving G. Wyllie in The Self-Made Man in America 
(New Brunswick: Rutgers University Press, 1954), p. 41. 


1 See pp. 147 ff. 



2 For a balanced summary of this discussion, see articles by Denis F. 
Johnston and Charles C. Killingsworth in the Monthly Labor Review, 
September 1968, pp. 1-17. 



3 A discussion that has developed since the earlier editions of this 
book. I did not then think such ideas within the realm of practical political 



1 This discussion assumes a satisfactory level of employment. When 
social imbalance is great, it will be clear that there is a strong case for 
correcting a shortage of demand by increased spending for needed public 
services rather than by a tax reduction which allows of increased spending 
for less needed private goods. 



2 Since the first edition of this book, the use of the sales tax has 
expanded—and for the reasons here urged. Though the views of authors 
are not to be trusted on such matters, it seems likely that the argument here 
offered has had something to do with the result. It has been repeatedly 
cited in legislative battles over the sales tax. 


1 Principles of Economics, 8th ed. (London: Macmillan, 1927), pp. 2- 


2 This was true of the Office of Economic Opportunity—the so-called 
poverty program—and was ultimately the reason for its effective demise. 


3 As earlier noted, in the first edition the provision of a guaranteed 
income was discussed but dismissed as "beyond reasonable hope." 


4 Chapter 18. 




1 J. Frederic Dewhurst and Associates, America's Needs and 
Resources, A New Survey (New York: Twentieth Century Fund, 1955), p. 
1053. These figures are the weighted average of agricultural and 
nonagricultural workers. The average work week in nonagricultural 
enterprise in 1950 was estimated to be 38.8 hours. 


2 U.S. Department of Labor, Monthly Labor Review, Vol. 98, No. 4 
(April 1975), p. 30. 


3 Dewhurst, pp. 726-727. 


4 U.S. Department of Labor, Monthly Labor Review, Vol. 98, No. 3 
(March 1975), p. 88. 


5 A matter I have taken up in more detail in Economics and the Public 
Purpose (Boston: Houghton Mifflin, 1973). 


6 Dewhurst, pp. 725-726. 




7 Alfred Marshall defined labor as "any exertion of mind or body 
undergone partly or wholly with a view to some good other than the 
pleasure derived directly from the work." Principles of Economics, 8th ed. 
(London: Macmillan, 1927), p. 65. This definition obviously recognizes a 
category of individuals for whom work is a reward in itself. However, this 
group, having been introduced, played little or no further part in Marshall's 
analysis. It has played almost no formal role in economic theory since. 



8 We have here an important reason why the income tax, despite 
frequent warnings of the damage to incentive, has so far had no visibly 
deleterious effect. The surtax rates fall almost entirely on members of the 
New Class. These are people who, by their own claim except when they 
are talking about the effect of income taxes, are not primarily motivated by 
money. Hence the tax, which also does not disturb the prestige structure— 
people are rated by before-tax income—touches no vital incentive. Were 
high marginal rates to be placed on, say, the overtime income of 
automobile workers, we would expect a substantial withdrawal of effort. 
Here pay, as an incentive, remains important. 



9 Equally dramatic was the American reaction to the Chinese Cultural 
Revolution. Almost no reputable spokesman defended its central tenet, 
which was that everyone should be sent out to do common labor. Yet, 
were all work identical, such a movement should have great appeal. The 
argument that it was inefficient was presumed sufficient to end all debate. 



lOSince the earlier editions of this book, a college president—of 
Haverford College—did take several months off to experiment with 
manual labor. His temporary desertion of the New Class attracted much 



11 Political capacity is another qualification, and it is of especial 
importance to those who seek to make their escape after reaching their 
adult years. The intensity of the campaigns for local political offices—city 
councilors, school committeemen and county supervisors—is to be 
explained by this fact, as also the enduring interest in appointive political 
office. Those who are already members of the New Class often fail to see 
how such posts are valued as an entree. They look askance at the 
competition for such posts between the less well educated members of the 
community. They fail to realize that such posts provide the greatest 
opportunity for such individuals and that it is upon such people that we 
depend for much good (as well as some bad) civic enterprise. The union is 
another important opportunity for the individual of political capacity. Cf. 
the interesting sketches by Harvey Swados in On the Line (Boston: 
Atlantic-Little, Brown, 1957). 


1 Bertrand Russell, The Conquest of Happiness (London: Allen & 
Unwin, 1930), p. 248. 



2 These are matters which I discuss at great length, and I think with 
greater precision, in The New Industrial State (Boston: Houghton Mifflin, 
1967) and Economics and the Public Purpose (Boston: Houghton Mifflin, 
1973). Indeed, the feeling that this somber and transcendent issue needed 
more attention was one of the inducements to these further books.